UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-04087
--------------------------------------------------
Manning & Napier Fund, Inc.
----------------------------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
290 Woodcliff Drive, Fairport, NY 14450
----------------------------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
B. Reuben Auspitz 290 Woodcliff Drive, Fairport, NY 14450
-----------------------------------------------------------------------------------------------------
(Name and address of agent for service)
Registrant’s telephone number, including area code: 585-325-6880
-------------------------------
Date of fiscal year end: December 31, 2006
----------------------------------------------------------------------
Date of reporting period: January 1, 2006 through December 31, 2006
--------------------------------------------------------------------
Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget (“OMB”) control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. Section 3507.
ITEM 1: REPORTS TO STOCKHOLDERS
February 26, 2007
To Shareholders of the following Series of the Manning & Napier Fund:
Small Cap Series
International Series
World Opportunities Series
Life Sciences Series
Technology Series
Financial Services Series
Core Bond Series
Core Plus Bond Series
New York Tax Exempt Series
Ohio Tax Exempt Series
Diversified Tax Exempt Series
Dear Shareholder:
Enclosed is a copy of the Annual Report for each of the above Series of the Manning & Napier Fund in which you were invested as of December 31, 2006. The reports include information about the Series’ performance as well as portfolio listings as of that date.
Please contact our Fund Services department at 1-800-466-3863 or your Client Consultant if you have any questions about the Annual Reports or about the Fund.
Sincerely,
/s/ Amy J. Williams
Amy J. Williams
Fund Services Manager
Manning & Napier Fund, Inc.
Core Bond Series
Annual Report
December 31, 2006
Management Discussion and Analysis (unaudited)
Dear Shareholders:
Interest rates rise and interest rates fall; when they do, so too do the market prices of fixed income securities. The one difference, when interest rates rise, prices fall, and when interest rates fall, prices rise. Over the long-term, however, the total returns generated by most fixed income securities track their coupons, or more specifically, their yields to maturity.
Given the added risk associated with corporate bonds and mortgage-backed bonds, those fixed income securities traditionally carry higher coupons or yields than U.S. Treasury securities with similar maturities. So as one would expect, over the long-term, corporate bonds and mortgage-backed bonds have provided higher returns than U.S. Treasuries. That tendency is what triggered the activation of the Core Bond Series back in April of 2005. What was interesting about 2006 is that this long-term tendency presented itself over a much shorter time period. Fixed income investors essentially earned their coupons over the past year; total returns tracked coupons pretty closely given the fact that interest rates at the end of the year were only modestly higher (about 30 basis points (i.e., 0.30%)) than where they were at the start of the year. In that environment, the Core Bond Series performed relatively well in 2006.
The lone exception to the “modestly” higher description was short-term rates; 3-month U.S. Treasury bill yields rose almost a full percentage point during the year as the Federal Reserve (the “Fed”) pushed the targeted Fed Funds rate up from 4.25% at the start of the year to 5.25% at the end of June. The target remained the same throughout the remainder of the year.
During the first quarter of the year, the Fed raised the Fed Funds target because it was concerned about the inflationary effects of a run-up in commodity prices. Crude oil traded very close to $70 a barrel and the Commodity Research Bureau Raw Industrials Index rose more than 5% during the first three months of the year. The Fed was also concerned about the inflationary effects of the increases in “resource utilization,” primarily in the labor markets. The actions of the Fed and the economic environment pushed rates higher across the entire yield curve.
During the second quarter of the year, a modest acceleration in the rate of inflation showed up in the inflation measures themselves. At the end of May, the Consumer Price Index (CPI) was growing at a year over year rate of 4.1%, a bit faster than its 3.4% growth rate in December of 2005. Looking at the same measure in a slightly different fashion, the annualized growth rate through the first 5 months of 2006 was 5.1%. Through May, the CPI was only rising at an annualized rate of 3.6%.
Given the volatility associated with the food and energy components of the inflation indices, the “core” rate of inflation, the index excluding its food and energy components, has become increasingly important. During the second quarter, the core rate of inflation had also accelerated; it was up 2.4% year over year in May, slightly higher than its December reading of 2.2%. Unfortunately, the annualized readings were more troubling. Through the first five months of 2006, the core CPI measure annualized at a 2.4% rate; through the first five months of this year, it was annualizing at 3.1%. Once again, interest rates moved higher across the entire yield curve.
Things began to change during the third quarter of the year with emerging signs that inflation pressures were receding. The Fed responded but left the Fed Funds target unchanged at both of its meetings during the quarter. The Fed was quite straightforward when it mentioned in its August press release that “inflation pressures seem likely to moderate over time, reflecting contained inflation expectations and the cumulative effects of monetary policy.” As for economic evidence of “the cumulative effects of monetary policy,” they were fairly widespread. Various indices related to economic growth rolled over during the quarter, and the Fed’s prior policy actions definitely played a role in the universally weak readings associated with the housing market. With the Fed on hold, short-term interest rates held steady, and intermediate- and longer-term interest rates moved sharply lower.
The Fed stayed on the same policy path during the fourth quarter, deciding at both of its meetings to leave the Fed Funds target unchanged. The reasoning remained the same, “inflation pressures seem likely to moderate over time.” However as the quarter progressed, there were subtle signs that the economic environment was holding just fine. The number of new jobs created each month grew throughout the quarter. The improving labor market, along with lower oil prices, translated into higher levels of consumer confidence. And as consumer spirits rose, same store sales picked back up after a miserable year over year reading in October. Short-term interest rates remained stable with the Fed on hold; after declining early in the quarter, longer-term rates retraced some of those gains as the year came to a close.
1
Management Discussion and Analysis (unaudited)
The yield spreads associated with corporate bonds and mortgage-backed securities narrowed in 2006; the tightening was more pronounced in the mortgage-backed sector of the market. That reflected an increase in demand, especially on the part of foreign buyers. In the corporate market, any tightening was a reflection of an aggregate improvement in corporate balance sheets and corporate credit quality. It was offset somewhat by a heightened concern about potential event risk(s).
As for the actual performance of the Core Bond Series in 2006, it came in at 4.51%. That was better than the Merrill Lynch U.S. Domestic Master Index (which includes all U.S. Treasury, U.S. Agency, investment grade corporate bonds, and plain vanilla mortgage-backed securities with maturities of more than 1-year), which returned 4.32% in 2006. The modest outperformance can be traced to two factors, issue selection with the corporate sector and a heavier weighting in the mortgage-backed sector. Within the Series’ corporate holdings, certain issues performed better than the corporate bond market in general. Mortgages were the best performing investment grade sector in 2006; the Series carried a heavier weighting to this sector than the benchmark given our interest rate outlook and the more attractive relative value of the mortgage sector throughout the year.
Over the longer-term interest rates and spreads will fluctuate; sometimes the cyclical and/or policy pressures will push them both higher, sometimes they will push both lower, and other times, like last year, all of the various factors will be a bit of a wash. The key to investment success requires the investor to focus on the secular (non-cyclical) trends and the fundamental forces that drive each, an approach that we apply to all of our investment decisions.
We appreciate your business and wish you all the very best in the coming year.
Sincerely,
Manning & Napier Advisors, Inc.
2
Performance Update as of December 31, 2006 (unaudited)
| | Average Annual Total Returns |
| | As of December 31, 2006 |
| | One | Since |
| | Year | Inception1 |
| | | |
Manning & Napier Fund, Inc. - Core Bond Series2 | 4.51% | 3.22% |
| | | |
Merrill Lynch U.S. Domestic Master Index3 | 4.32% | 3.73% |
The following graph compares the value of a $10,000 investment in the Manning & Napier Fund, Inc. - Core Bond Series from its inception1 (4/21/05) to present (12/31/06) to the Merrill Lynch U.S. Domestic Master Index.
Data for line graph to follow:
| | Manning & Napier Fund, Inc. | Merrill Lynch |
| Date | Core Bond Series2 | U.S. Domestic Master Index |
| 4/21/05 | $10,000 | $10,000 |
| 6/30/05 | 10,130 | 10,212 |
| 12/31/05 | 10,098 | 10,201 |
| 6/30/06 | 10,026 | 10,121 |
| 12/31/06 | 10,553 | 10,642 |
1Performance numbers for the Series and Index are calculated from April 21, 2005, the Series' inception date.
2The Series' performance does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. The Series' performance is historical and may not be indicative of future results.
3The unmanaged Merrill Lynch U.S. Domestic Master Index is a market value weighted measure that represents U.S. government, corporate, and pass-through securities issued by entities within the United States, by supranational entities, or by entities headquartered outside of the United States but who have issued dollar-denominated securities within the United States. The Index only includes investment grade securities with maturities of greater than one year. The Index returns assume reinvestment of coupons and, unlike Series returns, do not reflect any fees of expenses.
3
Shareholder Expense Example (unaudited)
As a shareholder of the Series, you may incur two types of costs: (1) transaction costs, including potential wire charges on redemptions and (2) ongoing costs, including management fees and other Series expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Series and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (July 1, 2006 to December 31, 2006).
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Series’ actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Series’ actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid during the period. You may use this information to compare the ongoing costs of investing in the Series and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transaction costs, such as potential wire charges on redemptions. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transaction costs were included, your costs would have been higher.
| | Beginning | Ending | Expenses Paid |
| | Account Value | Account Value | During Period* |
| | 7/1/06 | 12/31/06 | 7/1/06-12/31/06 |
| Actual | $1,000.00 | $1,052.50 | $4.14 |
| Hypothetical | | | |
| (5% return before expenses) | $1,000.00 | $1,021.17 | $4.08 |
*Expenses are equal to the Series’ annualized expense ratio (for the six-month period) of 0.80%, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). Expenses are based on the most recent fiscal half year; therefore, the expense ratio stated above may differ from the expense ratio stated in the financial highlights, which is based on one-year data. The Series’ total return would have been lower had certain expenses not been waived during the period.
4
Portfolio Composition as of December 31, 2006 (unaudited)
Data for pie chart to follow:
Sector Allocation1
| Consumer Discretionary | 5.7% |
| Consumer Staples | 0.5% |
| Energy | 1.8% |
| Financials | 7.9% |
| Health Care | 1.1% |
| Industrials | 5.5% |
| Information Technology | 1.5% |
| Materials | 0.6% |
| Utilities | 5.2% |
| U.S. Government Agencies | 45.2% |
| Cash, short-term investments, and liabilities, less other assets | 25.0% |
1As a percentage of net assets.
Credit Quality Ratings2,3
| Aaa | 6.6% |
| Aa | 12.5% |
| A | 37.2% |
| Baa | 43.7% |
2As a percentage of total corporate bonds.
3Based on ratings from Moody's, or the S&P equivalent. The Series may use different ratings provided by other rating agencies for purposes of determining compliance with the Series' investment policies.
5
Investment Portfolio - December 31, 2006
| | Credit | | |
| | Rating1 | Principal | Value |
| | (unaudited) | Amount | (Note 2) |
| | | | |
CORPORATE BONDS - 29.8% | | | |
Convertible Corporate Bonds - 3.1% | | | |
Consumer Discretionary - 0.9% | | | |
Hotels, Restaurants & Leisure - 0.9% | | | |
| Carnival Corp., 2.00%, 4/15/2021 | A3 | $305,000 | $390,400 |
| | | | |
Energy - 1.4% | | | |
Energy Equipment & Services - 1.4% | | | |
| Cooper Cameron Corp. (now known as Cameron International Corp.), 1.50%, 5/15/2024 | Baa1 | 220,000 | 353,375 |
| Schlumberger Ltd., 1.50%, 6/1/2023 | A1 | 170,000 | 299,837 |
Total Energy | | | 653,212 |
| | | | |
Utilities - 0.8% | | | |
Multi-Utilities - 0.8% | | | |
| Xcel Energy, Inc., 7.50%, 11/21/2007 | Baa1 | 195,000 | 366,113 |
| | | | |
Total Convertible Corporate Bonds | | | |
| (Identified Cost $1,222,362) | | | 1,409,725 |
| | | | |
Non-Convertible Corporate Bonds - 26.7% | | | |
Consumer Discretionary - 4.8% | | | |
Media - 3.0% | | | |
| AOL Time Warner (now known as Time Warner, Inc.), 7.625%, 4/15/2031 | Baa2 | 440,000 | 491,551 |
| Comcast Corp., 6.50%, 11/15/2035 | Baa2 | 570,000 | 574,026 |
| The Walt Disney Co., 7.00%, 3/1/2032 | A3 | 280,000 | 323,333 |
| | | | 1,388,910 |
| | | | |
Multiline Retail - 1.1% | | | |
| Target Corp., 5.875%, 3/1/2012 | A1 | 485,000 | 498,504 |
| | | | |
Specialty Retail - 0.7% | | | |
| Lowe's Companies, Inc., 8.25%, 6/1/2010 | A1 | 300,000 | 327,847 |
Total Consumer Discretionary | | | 2,215,261 |
| | | | |
Consumer Staples - 0.5% | | | |
Food & Staples Retailing - 0.5% | | | |
| The Kroger Co., 7.25%, 6/1/2009 | Baa2 | 215,000 | 223,228 |
| | | | |
Energy - 0.4% | | | |
Oil, Gas & Consumable Fuels - 0.4% | | | |
| Anadarko Petroleum Corp., 5.95%, 9/15/2016 | Baa2 | 185,000 | 185,387 |
| | | | |
Financials - 7.9% | | | |
Capital Markets - 1.7% | | | |
| The Goldman Sachs Group, Inc., 6.345%, 2/15/2034 | A1 | 310,000 | 313,797 |
| Lehman Brothers Holdings, Inc., 6.625%, 1/18/2012 | A1 | 240,000 | 253,581 |
| Merrill Lynch & Co., Inc., 6.05%, 5/16/2016 | A1 | 225,000 | 232,884 |
| | | | 800,262 |
The accompanying notes are an integral part of the financial statements.
6
Investment Portfolio - December 31, 2006
| | Credit | | |
| | Rating1 | Principal | Value |
| | (unaudited) | Amount | (Note 2) |
| | | | |
CORPORATE BONDS (continued) | | | |
| | | | |
Non-Convertible Corporate Bonds (continued) | | | |
Financials (continued) | | | |
Commercial Banks - 2.6% | | | |
| PNC Funding Corp., 7.50%, 11/1/2009 | A3 | $285,000 | $300,971 |
| U.S. Bank National Association, 6.375%, 8/1/2011 | Aa2 | 50,000 | 52,195 |
| Wachovia Corp., 5.25%, 8/1/2014 | A1 | 590,000 | 582,813 |
William Street Funding Corp.2,3, 5.58563%, 6/23/2012 | Aaa | 250,000 | 250,000 |
| | | | 1,185,979 |
| | | | |
Diversified Financial Services - 1.5% | | | |
| Bank of America Corp. Capital Trust VI, 5.625%, 3/8/2035 | Aa3 | 455,000 | 430,713 |
| Citigroup, Inc., 5.00%, 9/15/2014 | Aa2 | 260,000 | 253,863 |
| | | | 684,576 |
| | | | |
Insurance - 2.1% | | | |
| Ambac Financial Group, Inc., 5.95%, 12/5/2035 | Aa2 | 345,000 | 343,564 |
| American International Group, Inc., 4.25%, 5/15/2013 | Aa2 | 660,000 | 618,861 |
| | | | 962,425 |
Total Financials | | | 3,633,242 |
| | | | |
Health Care - 1.1% | | | |
Pharmaceuticals - 1.1% | | | |
| Abbott Laboratories, 3.50%, 2/17/2009 | A1 | 265,000 | 256,438 |
Wyeth4, 5.50%, 3/15/2013 | A3 | 230,000 | 231,488 |
Total Health Care | | | 487,926 |
| | | | |
Industrials - 5.5% | | | |
Aerospace & Defense - 0.7% | | | |
| Boeing Capital Corp., 6.50%, 2/15/2012 | A2 | 310,000 | 326,858 |
| | | | |
Air Freight & Logistics - 0.5% | | | |
| FedEx Corp., 3.50%, 4/1/2009 | Baa2 | 210,000 | 201,693 |
| | | | |
Airlines - 1.0% | | | |
| Southwest Airlines Co., 5.25%, 10/1/2014 | Baa1 | 475,000 | 458,824 |
| | | | |
Industrial Conglomerates - 1.4% | | | |
| General Electric Capital Corp., 6.75%, 3/15/2032 | Aaa | 570,000 | 652,808 |
| | | | |
Machinery - 0.6% | | | |
| John Deere Capital Corp., 7.00%, 3/15/2012 | A3 | 235,000 | 251,482 |
| | | | |
Road & Rail - 1.3% | | | |
| CSX Corp., 6.75%, 3/15/2011 | Baa2 | 285,000 | 299,248 |
| Union Pacific Corp., 6.65%, 1/15/2011 | Baa2 | 290,000 | 303,088 |
| | | | 602,336 |
Total Industrials | | | 2,494,001 |
The accompanying notes are an integral part of the financial statements.
7
Investment Portfolio - December 31, 2006
| | Credit | | |
| | Rating1 | Principal | Value |
| | (unaudited) | Amount | (Note 2) |
| | | | |
CORPORATE BONDS (continued) | | | |
| | | | |
Non-Convertible Corporate Bonds (continued) | | | |
Information Technology - 1.5% | | | |
Communications Equipment - 1.5% | | | |
| Cisco Systems, Inc., 5.25%, 2/22/2011 | A1 | $205,000 | $205,514 |
| Corning, Inc., 6.20%, 3/15/2016 | Baa2 | 475,000 | 483,604 |
Total Information Technology | | | 689,118 |
| | | | |
Materials - 0.6% | | | |
Metals & Mining - 0.6% | | | |
| Alcoa, Inc., 7.375%, 8/1/2010 | A2 | 250,000 | 266,512 |
| | | | |
Utilities - 4.4% | | | |
Electric Utilities - 1.9% | | | |
| American Electric Power Co., Inc., 5.375%, 3/15/2010 | Baa2 | 305,000 | 304,718 |
| Exelon Generation Co. LLC, 5.35%, 1/15/2014 | Baa1 | 580,000 | 568,105 |
| | | | 872,823 |
Independent Power Producers & Energy Traders - 0.5% | | | |
| TXU Energy Co., 7.00%, 3/15/2013 | Baa2 | 215,000 | 224,967 |
| | | | |
Multi-Utilities - 2.0% | | | |
| CenterPoint Energy Resources Corp., 7.875%, 4/1/2013 | Baa3 | 335,000 | 371,686 |
| Duke Energy Field Services Corp., 7.875%, 8/16/2010 | Baa2 | 280,000 | 301,179 |
| Sempra Energy, 7.95%, 3/1/2010 | Baa1 | 210,000 | 225,299 |
| | | | 898,164 |
Total Utilities | | | 1,995,954 |
| | | | |
Total Non-Convertible Corporate Bonds | | | |
| (Identified Cost $12,293,700) | | | 12,190,629 |
| | | | |
TOTAL CORPORATE BONDS | | | |
| (Identified Cost $13,516,062) | | | 13,600,354 |
| | | | |
U.S. GOVERNMENT AGENCIES - 45.2% | | | |
Mortgage-Backed Securities - 43.1% | | | |
| Fannie Mae, Pool #795855, 5.50%, 9/1/2019 | | 339,392 | 339,637 |
| Fannie Mae, Pool #786281, 6.50%, 7/1/2034 | | 290,977 | 296,742 |
| Fannie Mae, Pool #815409, 4.50%, 2/1/2035 | | 234,705 | 220,007 |
Fannie Mae, TBA5, 5.00%, 1/15/2022 | | 1,131,000 | 1,111,560 |
Fannie Mae, TBA5, 4.50%, 2/15/2022 | | 1,361,000 | 1,312,088 |
Fannie Mae, TBA5, 5.00%, 1/15/2037 | | 2,264,000 | 2,185,466 |
Fannie Mae, TBA5, 5.50%, 1/15/2037 | | 3,478,000 | 3,436,699 |
Fannie Mae, TBA5, 6.00%, 1/15/2037 | | 1,334,000 | 1,342,754 |
| Federal Home Loan Mortgage Corp., Pool #M90974, 4.50%, 3/1/2010 | | 79,896 | 78,556 |
| Federal Home Loan Mortgage Corp., Pool #B16835, 5.50%, 10/1/2019 | | 342,599 | 342,660 |
The accompanying notes are an integral part of the financial statements.
8
Investment Portfolio - December 31, 2006
| | Principal | |
| | | Value |
| | Shares | (Note 2) |
| | | |
U.S. GOVERNEMENT AGENCIES (continued) | | |
Mortgage-Backed Securities (continued) | | |
| Federal Home Loan Mortgage Corp., Pool #A27705, 6.50%, 10/1/2034 | $118,329 | $120,638 |
| Federal Home Loan Mortgage Corp., Pool #G01782, 6.50%, 2/1/2035 | 85,659 | 87,428 |
Federal Home Loan Mortgage Corp., TBA5, 4.50%, 3/15/2021 | 1,369,000 | 1,318,090 |
Federal Home Loan Mortgage Corp., TBA5, 5.00%, 2/15/2022 | 927,000 | 910,198 |
Federal Home Loan Mortgage Corp., TBA5, 5.00%, 1/15/2037 | 1,575,000 | 1,519,384 |
Federal Home Loan Mortgage Corp., TBA5, 5.50%, 1/15/2037 | 2,028,000 | 2,005,185 |
Federal Home Loan Mortgage Corp., TBA5, 6.00%, 1/15/2037 | 753,000 | 758,413 |
| GNMA, Pool #487193, 5.00%, 4/15/2020 | 100,338 | 99,080 |
| GNMA, Pool #563559, 6.50%, 4/15/2032 | 64,834 | 66,610 |
| GNMA, Pool #631703, 6.50%, 9/15/2034 | 95,076 | 97,540 |
GNMA, TBA5, 5.50%, 1/15/2037 | 1,001,000 | 995,995 |
GNMA, TBA5, 6.00%, 1/15/2037 | 561,000 | 568,714 |
GNMA, TBA5, 5.00%, 2/15/2037 | 504,000 | 489,983 |
| | | |
Total Mortgage-Backed Securities | | |
| (Identified Cost $19,864,578) | | 19,703,427 |
| | | |
Other Agencies - 2.1% | | |
| Federal Home Loan Mortgage Corp., 6.25%, 7/15/2032 | | |
| (Identified Cost $899,863) | 825,000 | 949,451 |
| | | |
TOTAL U.S. GOVERNMENT AGENCIES | | |
| (Identified Cost $20,764,441) | | 20,652,878 |
| | | |
SHORT-TERM INVESTMENTS - 54.3% | | |
| Dreyfus Treasury Cash Management - Institutional Shares | 846,415 | 846,415 |
| Fannie Mae Discount Note, 1/10/2007 | $10,500,000 | 10,486,481 |
| Fannie Mae Discount Note, 1/12/2007 | 1,650,000 | 1,647,179 |
| Fannie Mae Discount Note, 2/14/2007 | 1,600,000 | 1,590,264 |
| Federal Home Loan Bank Discount Note, 1/10/2007 | 2,250,000 | 2,247,103 |
| Federal Home Loan Bank Discount Note, 1/19/2007 | 1,500,000 | 1,496,160 |
| Federal Home Loan Bank Discount Note, 1/30/2007 | 3,000,000 | 2,987,566 |
| Federal Home Loan Bank Discount Note, 2/9/2007 | 2,000,000 | 1,988,744 |
| Federal Home Loan Bank Discount Note, 3/16/2007 | 1,550,000 | 1,534,128 |
| | | |
TOTAL SHORT-TERM INVESTMENTS | | |
| (Identified Cost $24,823,651) | | 24,824,040 |
The accompanying notes are an integral part of the financial statements.
9
Investment Portfolio - December 31, 2006
| | Value |
| | (Note 2) |
| | |
TOTAL INVESTMENTS - 129.3% | |
| (Identified Cost $59,104,154) | $59,077,272 |
| | |
LIABILITIES, LESS OTHER ASSETS - (29.3%) | (13,381,196) |
| | |
NET ASSETS - 100% | $45,696,076 |
1Credit ratings from Moody's (unaudited).
2The coupon rate is a floating rate and is subject to change quarterly. The coupon rate stated is the rate as of December 31, 2006.
3Restricted securities - Investment in securities that are restricted as to public resale under the Securities Act of 1933, as amended. This security has been determined to be illiquid under guidelines established by the Board of Directors. This security was acquired on June 22, 2006 at a cost of $250,000 ($100.00 per share) and amounts to $250,000, or 0.5%, of the Series' net assets as of December 31, 2006.
4The coupon rate will increase with every ratings downgrade and decrease with every ratings upgrade. The coupon rate stated is the rate as of December 31, 2006.
5Securities purchased on a forward commitment or when-issued basis. TBA - to be announced.
The accompanying notes are an integral part of the financial statements.
10
Statement of Assets and Liabilities
December 31, 2006
ASSETS: | |
| | |
| Investments, at value (identified cost, $59,104,154) (Note 2) | $59,077,272 |
| Receivable for fund shares sold | 4,500,202 |
| Interest receivable | 272,631 |
| Dividends receivable | 4,830 |
| | |
| TOTAL ASSETS | 63,854,935 |
| | |
LIABILITIES: | |
| | |
| Accrued management fees (Note 3) | 18,571 |
| Accrued fund accounting and transfer agent fees (Note 3) | 2,954 |
| Accrued Chief Compliance Officer service fees (Note 3) | 436 |
| Accrued directors' fees (Note 3) | 157 |
| Payable for purchases of delayed delivery securities (Note 2) | 18,110,472 |
| Audit fees payable | 25,397 |
| Other payables and accrued expenses | 872 |
| | |
| TOTAL LIABILITIES | 18,158,859 |
| | |
TOTAL NET ASSETS | $45,696,076 |
| | |
NET ASSETS CONSIST OF: | |
| | |
| Capital stock | $45,789 |
| Additional paid-in-capital | 45,643,653 |
| Undistributed net investment income | 7,906 |
| Accumulated net realized gain on investments | 25,610 |
| Net unrealized depreciation on investments | (26,882) |
| | |
TOTAL NET ASSETS | $45,696,076 |
| | |
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE ($45,696,076/4,578,893 shares) | $9.98 |
The accompanying notes are an integral part of the financial statements.
11
For the Year Ended December 31, 2006
INVESTMENT INCOME: | |
| | |
| Interest | $1,552,494 |
| Dividends | 52,737 |
| | |
| Total Investment Income | 1,605,231 |
| | |
EXPENSES: | |
| | |
| Management fees (Note 3) | 206,228 |
| Fund accounting and transfer agent fees (Note 3) | 33,510 |
| Directors' fees (Note 3) | 7,000 |
| Chief Compliance Officer service fees (Note 3) | 6,049 |
| Audit fees | 27,798 |
| Custodian fees | 4,200 |
| Miscellaneous | 17,322 |
| | |
| Total Expenses | 302,107 |
| Less reduction of expenses (Note 3) | (26,861) |
| | |
| Net Expenses | 275,246 |
| | |
| NET INVESTMENT INCOME | 1,329,985 |
| | |
REALIZED AND UNREALIZED GAIN ON INVESTMENTS: | |
| | |
| Net realized gain on investments | 225,664 |
| Net change in unrealized depreciation on investments | 123,352 |
| | |
| NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS | 349,016 |
| | |
| NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS | $1,679,001 |
The accompanying notes are an integral part of the financial statements.
12
Statements of Changes in Net Assets
| | For the Year | For the Period |
| Ended 12/31/06 | 4/21/051 to 12/31/05 |
INCREASE (DECREASE) IN NET ASSETS: | | |
| | | |
OPERATIONS: | | |
| | | |
| Net investment income | $1,329,985 | $590,265 |
| Net realized gain (loss) on investments | 225,664 | (200,054) |
| Net change in unrealized depreciation on investments | 123,352 | (150,234) |
| | | |
| Net increase from operations | 1,679,001 | 239,977 |
| | | |
DISTRIBUTIONS TO SHAREHOLDERS (Note 8): | | |
| | | |
| From net investment income | (1,327,178) | (585,166) |
| | | |
CAPITAL STOCK ISSUED AND REPURCHASED: | | |
| | | |
| Net increase from capital share transactions (Note 5) | 16,766,575 | 28,922,867 |
| | | |
| Net increase in net assets | 17,118,398 | 28,577,678 |
| | | |
NET ASSETS: | | |
| | | |
| Beginning of period | 28,577,678 | - |
| | | |
End of period (including undistributed net investment income of $7,906 and $5,099, respectively) | $45,696,076 | $28,577,678 |
1Commencement of operations.
The accompanying notes are an integral part of the financial statements.
13
| | For the Year | For the Period |
| | Ended 12/31/06 | 4/21/051to 12/31/05 |
| | | |
Per share data (for a share outstanding throughout | | |
each period): | | |
| | | |
Net asset value - Beginning of period | $9.89 | $10.00 |
| | | |
| Income (loss) from investment operations: | | |
| Net investment income | 0.36 | 0.21 |
| Net realized and unrealized gain (loss) on investments | 0.09 | (0.11) |
| | | |
| Total from investment operations | 0.45 | 0.10 |
| | | |
| Less distributions to shareholders: | | |
| From net investment income | (0.36) | (0.21) |
| | | |
Net asset value - End of period | $9.98 | $9.89 |
| | | |
Total return2 | 4.51% | 0.98% |
| | | |
Ratios (to average net assets)/Supplemental Data: | | |
| Expenses* | 0.80% | 0.80%3 |
| Net investment income | 3.87% | 3.08%3 |
| | | |
| Portfolio turnover | 313% | 293% |
| | | |
Net assets - End of period (000's omitted) | $45,696 | $28,578 |
*The investment advisor did not impose all of its management fee. If these expenses had been incurred by the Series, the expense ratio (to average net assets) would have been increased as follows:
1Commencement of operations.
2Represents aggregate total return for the period indicated, and assumes reinvestment of all distributions. Total return would have been lower had certain expenses not been waived during the period. Periods less than one year are not annualized.
3Annualized.
The accompanying notes are an integral part of the financial statements.
14
Notes to Financial Statements
1. ORGANIZATION
Core Bond Series (the "Series") is a no-load non-diversified series of Manning & Napier Fund, Inc. (the "Fund"), formerly Exeter Fund, Inc. The Fund is organized in Maryland and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company.
The Series' investment objective is to provide long-term total return by investing primarily in investment grade bonds and other financial instruments, including derivatives, with economic characteristics similar to bonds.
The Fund’s Advisor is Manning & Napier Advisors, Inc. (the “Advisor”). Shares of the Series are offered to investors, clients and employees of the Advisor and its affiliates. The total authorized capital stock of the Fund consists of 1.7 billion shares of common stock each having a par value of $0.01. As of December 31, 2006, 1.16 billion shares have been designated in total among 21 series, of which 75 million have been designated as Core Bond Series Class A common stock.
2. SIGNIFICANT ACCOUNTING POLICIES
Security Valuation
Debt securities, including government bonds, sovereign bonds, corporate bonds and mortgage-backed securities, will normally be valued on the basis of evaluated bid prices provided by the Fund’s pricing service.
Securities for which representative valuations or prices are not available from the Fund's pricing service may be valued at fair value. If trading or events occurring after the close of the principal market in which securities are traded are expected to materially affect the value of those securities, then they may be valued at their fair value, taking this trading or these events into account. Fair value is determined in good faith by the Advisor under procedures approved by and under the general supervision and responsibility of the Fund’s Board of Directors (the “Board”).
Short-term investments that mature in sixty days or less are valued at amortized cost, which approximates market value. Investments in open-end investment companies are valued at their net asset value per share on valuation date.
Security Transactions, Investment Income and Expenses
Security transactions are accounted for on trade date. Interest income, including amortization of premium and accretion of discounts using the effective interest method, is earned from settlement date and accrued daily. Dividend income and expenses are recorded on an accrual basis.
Most expenses of the Fund can be attributed to a specific series. Expenses which cannot be directly attributed are apportioned among the series in the Fund in such a manner as deemed equitable by the Fund's Board, taking into consideration, among other things, the nature and type of expense.
The Series uses the identified cost method for determining realized gain or loss on investments for both financial statement and federal income tax reporting purposes.
Securities Purchased on a When-Issued Basis or Forward Commitment
The Series may purchase securities on a when-issued basis or forward commitment. These transactions involve a commitment by the Series to purchase securities for a predetermined price with payment and delivery taking place beyond the customary settlement period. When such purchases are outstanding, the Series will designate liquid assets in an amount sufficient to meet the purchase price. When purchasing a security on a delayed delivery basis, the Series
15
Notes to Financial Statements
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Securities Purchased on a When-Issued Basis or Forward Commitment (continued)
assumes the rights and risks of ownership of the security, including the risk of price and yield fluctuations, and takes such fluctuations into account when determining its net asset value. The Series may sell the when-issued securities before they are delivered, which may result in a capital gain or loss.
In connection with its ability to purchase or sell securities on a forward commitment basis, the Series may enter into forward roll transactions principally using To Be Announced (TBA) securities. Forward roll transactions require the sale of securities for delivery in the current month, and a simultaneous agreement to repurchase substantially similar (same type, coupon and maturity) securities on a specified future date. Risks of entering into forward roll transactions include the potential inability of the counterparty to meet the terms of the agreement; the potential of the Series to receive inferior securities at redelivery as compared to the securities sold to the counterparty; counterparty credit risk; and the potential pay down speed variance between the mortgage-backed pools. During the roll period, the Series forgoes principal and interest paid on the securities. The Series accounts for such dollar rolls as purchases and sales. The Series had TBA dollar rolls outstanding as of December 31, 2006, which are included in Payable for Purchases of Delayed Delivery Securities on the Statement of Assets and Liabilities.
Restricted Securities
Restricted securities are purchased in private placement transactions, are not registered under the Securities Act of 1933, as amended, and may have contractual restrictions on resale. Information regarding restricted securities is included at the end of the Series’ Investment Portfolio.
Illiquid Securities
A security may be considered illiquid if so deemed in good faith by the Advisor under procedures approved by and under the general supervision and responsibility of the Fund’s Board. Securities that are illiquid are marked with the applicable footnote on the Investment Portfolio.
Federal Taxes
The Series' policy is to comply with the provisions of the Internal Revenue Code applicable to regulated investment companies. The Series is not subject to federal income or excise tax to the extent that the Series distributes to shareholders each year its taxable income, including any net realized gains on investments, in accordance with requirements of the Internal Revenue Code. Accordingly, no provision for federal income tax or excise tax has been made in the financial statements.
Distributions of Income and Gains
Distributions to shareholders of net investment income and net realized gains are made annually. An additional distribution may be necessary to avoid taxation of the Series. Distributions are recorded on the ex-dividend date.
Indemnifications
The Fund’s organizational documents provide former and current directors and officers with a limited indemnification against liabilities arising in connection with the performance of their duties to the Fund. In the normal course of business, the Fund may also enter into contracts that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown as this would be dependent on future claims that may be made against the Fund. The risk of material loss from such claims is considered remote.
16
Notes to Financial Statements
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Other
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
3. TRANSACTIONS WITH AFFILIATES
The Fund has an Investment Advisory Agreement (the “Agreement”) with the Advisor, for which the Series pays a fee, computed daily and payable monthly, at an annual rate of 0.60% of the Series’ average daily net assets.
Under the Agreement, personnel of the Advisor provide the Series with advice and assistance in the choice of investments and the execution of securities transactions, and otherwise maintain the Series’ organization. The Advisor also provides the Fund with necessary office space and fund administration and support services. The salaries of all officers of the Fund (except a percentage of the Fund’s Chief Compliance Officer’s salary, which is paid by the Fund, and the Special Assistant Secretary’s salary, which is paid by BISYS Fund Services Ohio, Inc. (“BISYS”)), and of all Directors who are "affiliated persons" of the Fund, or of the Advisor, and all personnel of the Fund, or of the Advisor, performing services relating to research, statistical and investment activities, are paid by the Advisor. Each "non-affiliated" Director receives an annual stipend, which is allocated among all the active series of the Fund. In addition, these Directors also receive a fee per Board meeting attended for each active series of the Fund plus a fee for each committee meeting attended.
The Advisor has contractually agreed, until at least April 30, 2008, to waive its fee and, if necessary, pay other operating expenses of the Series in order to maintain total expenses for the Series at no more than 0.80% of average daily net assets each year. Accordingly, the Advisor waived fees of $26,861 for the year ended December 31, 2006, which is reflected as a reduction of expenses on the Statement of Operations. The Advisor is not eligible to recoup any expenses that have been waived or reimbursed in prior years.
Manning & Napier Investor Services, Inc., a registered broker-dealer affiliate of the Advisor, acts as distributor for the Fund's shares. The services of Manning & Napier Investor Services, Inc. are provided at no additional cost to the Series.
For fund accounting and transfer agent services, through October 31, 2006, the Fund paid the Advisor an annual fee of 0.12% of the Fund’s average daily net assets up to $900 million, 0.09% of the Fund’s average daily net assets between $900 million and $1.5 billion, and 0.05% of the Fund’s average daily net assets over $1.5 billion. Effective November 1, 2006, the fee rates were reduced as follows: 0.11% of the Fund’s average daily net assets up to $900 million, 0.07% of the Fund’s average daily net assets between $900 million and $1.5 billion, and 0.04% of the Fund’s average daily net assets over $1.5 billion. Additionally, certain transaction and account-based fees and out-of-pocket expenses, including charges for reporting relating to the Fund’s compliance program, are charged. Expenses not directly attributable to a series are allocated based on each series’ relative net assets or number of accounts, depending on the expense. The Advisor has an agreement with BISYS under which BISYS serves as sub-accounting services and sub-transfer agent.
17
Notes to Financial Statements
4. PURCHASES AND SALES OF SECURITIES
For the year ended December 31, 2006, purchases and sales of securities, other than United States Government securities and short-term securities, were $8,018,100 and $5,518,275, respectively. Purchases and sales of United States Government securities, other than short-term securities, were $95,407,232 and $90,678,079, respectively.
5. CAPITAL STOCK TRANSACTIONS
Transactions in shares of Core Bond Series were:
| For the Year | For the period 4/21/05 (commencement |
| | Ended 12/31/06 | of operations) to 12/31/05 |
| | Shares | Amount | Shares | Amount |
| Sold | 1,637,576 | $16,250,398 | 2,995,471 | $29,993,823 |
| Reinvested | 130,284 | 1,304,357 | 58,124 | 571,940 |
| Repurchased | (79,452) | (788,180) | (163,110) | (1,642,896) |
| Total | 1,688,408 | $16,766,575 | 2,890,485 | $28,922,867 |
Substantially all of the Series’ shares represent investments by fiduciary accounts over which the Advisor has sole investment discretion.
6. FINANCIAL INSTRUMENTS
The Series may trade in financial instruments with off-balance sheet risk in the normal course of its investing activities to assist in managing exposure to various market risks. These financial instruments include written options, forward foreign currency exchange contracts and futures contracts and may involve, to a varying degree, elements of risk in excess of the amounts recognized for financial statement purposes. No such investments were held by the Series on December 31, 2006.
7. FOREIGN SECURITIES
Investing in securities of foreign companies and foreign governments involves special risks and considerations not typically associated with investing in securities of domestic companies and the United States Government. These risks include revaluation of currencies and future adverse political and economic developments. Moreover, securities of foreign companies and foreign governments and their markets may be less liquid and their prices more volatile than those of comparable domestic companies and the United States Government. No such investments were held by the Series on December 31, 2006.
8. FEDERAL INCOME TAX INFORMATION
The amount and characterization of certain income and capital gains to be distributed are determined in accordance with federal income tax regulations, which may differ from accounting principles generally accepted in the United States of America. These differences are primarily due to differing book and tax treatments in the timing of the recognition of net investment income or gains and losses, including Post-October losses. The Series may periodically make reclassifications among its capital accounts to reflect income and gains available for distribution (or available capital loss carryovers) under income tax regulations, without impacting the Series' net asset value. Any such reclassifications are not reflected in the financial highlights.
18
Notes to Financial Statements
8. FEDERAL INCOME TAX INFORMATION (continued)
The tax character of distributions paid were as follows:
| | | For the Period 4/21/05 |
| For the Year | (commencement of |
| Ended 12/31/06 | operations) to 12/31/05 |
| | | |
| Ordinary income | $1,327,178 | $585,166 |
For the year ended December 31, 2006, the Series elected to defer $9,026 of capital losses attributable to Post-October losses.
At December 31, 2006, the tax basis components of distributable earnings and the net unrealized depreciation based on identified cost for federal income tax purposes were as follows:
| Cost for federal income tax purposes | $59,104,154 |
| | |
| Unrealized appreciation | $333,744 |
| Unrealized depreciation | (360,626) |
| | |
| Net unrealized depreciation | $(26,882) |
| Undistributed ordinary income | 42,542 |
9. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement 109. FIN 48 supplements FASB Statement 109, Accounting for Income Taxes, by defining the confidence level that a tax position must meet in order to be recognized in the financial statements. FIN 48 provides guidance for how a fund should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the fund has taken or expects to take on a tax return. FIN 48 requires that the tax effects of a position be recognized only if it is “more likely than not” to be sustained based solely on its technical merits. Tax positions not deemed to meet the more likely than not threshold would be recorded as a tax benefit or expense in the current year. FIN 48 needs to be implemented no later than the first required financial statement reporting period for its fiscal year beginning after December 15, 2006 and is to be applied to all open tax years as of the effective date. At adoption, the financial statements must be adjusted to reflect only those tax positions that are more likely than not to be sustained as of the adoption date. Management of the Fund is currently evaluating the impact that FIN 48 will have on the Series’ financial statements.
In addition, in September 2006, FASB Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“FAS 157”) was issued, and is effective for fiscal years beginning after November 15, 2007. FAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosure about fair value measurements. The standard does not expand the use of fair value in any new circumstances, but provides clarification on acceptable fair value methods and applications. At this time, management is evaluating the implications of FAS 157, but it is not expected to materially impact the Series’ financial statements.
19
Report of Independent Registered Public Accounting Firm
To the Board of Directors of Manning & Napier Fund, Inc. and Shareholders of Core Bond Series:
In our opinion, the accompanying statement of assets and liabilities, including the investment portfolio (except for credit ratings), and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the Core Bond Series (a series of Manning & Napier Fund, Inc., hereafter referred to as the "Series") at December 31, 2006, and the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Series’ management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Columbus, Ohio
February 9, 2007
20
Renewal of Investment Advisory Agreement (unaudited)
At the Manning & Napier Fund, Inc. (the “Fund”) Board of Directors’ (the “Board”) annual in-person meeting, held on November 16, 2006, the Investment Advisory Agreement (the “Agreement”) between the Fund and Manning & Napier Advisors, Inc. (the “Advisor”) was reviewed by the Board for renewal. In connection with the decision whether to renew the Agreement, a variety of material was prepared for and reviewed by the Board. In addition, at the meeting of the Board, representatives of the Advisor presented additional oral and written information to help the Board evaluate the Advisor’s performance under the Agreement over the previous year. The Board then deliberated on the renewal of the Agreement in light of the various material provided prior to and at the meeting.
In connection with its review and deliberations, the Board considered the following factors and reached a conclusion with respect to such factors.
| · | The Board considered the services provided by the Advisor under the Agreement including, among others: deciding what securities to purchase and sell for each Series; arranging for the purchase and sale of such securities by placing orders with broker-dealers; administering the affairs of the Fund (including the books and records of the Fund not maintained by third party service providers such as the custodian or sub-transfer agent); arranging for the insurance coverage for the Fund; and supervising the preparation of tax returns, SEC filings (including registration statements) and reports to shareholders for the Fund. The Board discussed the quality of these services with representatives from the Advisor and concluded that the Advisor was performing its services to the Fund required under the Agreement in a reasonable manner. |
| · | The Board considered the investment performance of the various Series of the Fund. The investment performance for each Series was reviewed on a cumulative basis since inception and on a one year basis. In addition, annualized peformance for the following time periods was considered: inception, three year, five year, ten year, and current market cycle. A market cycle includes periods of both rising and falling markets. Returns for established benchmark indices for each Series were provided for each time period. In addition, the Board considered at the meeting (and considers on a quarterly basis) a peer group performance analysis consisting of Morningstar universes of mutual funds with similar investment objectives. The Board discussed the performance with representatives from the Advisor and concluded that the investment performance of each of the Fund’s Series was reasonable based on the Fund’s actual performance and comparative performance, especially performance over the current market cycle. |
| · | The Board considered the costs of the Advisor’s services and the profits of the Advisor as they relate to the Advisor’s services to the Fund under the Agreement. In reviewing the Advisor’s costs and profits, the Board discussed the Advisor’s revenues generated from the Fund (on both an actual and adjusted basis) and its expenses associated with providing the services under the Agreement. In addition, the Board reviewed the Advisor’s expenses associated with Fund activities outside of the Agreement (such as expense reimbursements pursuant to expense caps and payments made by the Advisor to third party platforms on which shares of the Fund are available for purchase). It was noted by representatives of the Advisor that 6 of the 18 active Series of the Fund are currently experiencing expenses above the capped expense ratios. After discussing the above costs and profits, the Board concluded that the Advisor’s profitability relating to its services provided under the Agreement is reasonable. |
| · | The Board considered the fees and expenses of the various Series of the Fund. The Advisor presented the advisory fees and total expenses for each Series, including the advisory fee adjusted for any expense waivers or reimbursements (either contractual or voluntary) paid by the Advisor. The advisory fees and expense ratios of each Series were compared to an average (on both a mean and median basis) of similar funds as disclosed on the Morningstar database. Representatives of the Advisor discussed with the Board the levels of its advisory fee for each Series of the Fund and as compared to the median and mean advisory fees for similar funds as listed on Morningstar. Expense ratios for every Series, except the High Yield Bond Series, are currently below the median and mean for similar funds as listed on Morningstar. Based on their review of the information provided, the Board concluded that the fees and expenses of each Series of the Fund were reasonable on a comparative basis. |
21
Renewal of Investment Advisory Agreement (unaudited)
| · | The Board also considered the other benefits the Advisor derives from its relationship with the Fund. Such other benefits include certain research products provided by soft dollars. Given the level of soft dollar transactions involving the Fund, the Board concluded that these additional benefits to the Advisor were reasonable. |
| · | In addition to the factors described above, the Board considered the Advisor’s personnel, the Advisor’s investment strategies, the Advisor’s policies and procedures relating to compliance with personal securities transactions, and the Advisor’s reputation, expertise and resources in domestic and foreign financial markets. The Board concluded that these factors support the conclusion that the Advisor performs its services in a reasonable manner. |
| · | The Board did not consider economies of scale at this time because of the multiple uses of the Fund (for the Advisor’s discretionary investment account clients in addition to direct investors), the current profitability of the Advisor’s services to the Fund under the Agreement, and the overall size of the Fund complex. |
Based on the Board’s conclusions regarding the factors described above, the Board, including a majority of Directors that are “not interested” as defined in the Investment Company Act of 1940, approved the renewal of the Agreement for another year. In the course of their deliberations, the Directors did not identify any particular information that was all important or controlling.
22
Directors’ and Officers’ Information (unaudited)
The Statement of Additional Information provides additional information about the Fund's directors and officers and can be obtained without charge by calling 1-800-466-3863, at www.manningnapieradvisors.com, or on the EDGAR Database on the SEC Internet web site (http:\\www.sec.gov). The following chart shows certain information about the Fund's officers and directors, including their principal occupations during the last five years. Unless specific dates are provided, the individuals have held the listed positions for longer than five years.
INTERESTED DIRECTOR/OFFICER | |
| Name: | B. Reuben Auspitz* |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 59 |
| Current Position(s) Held with Fund: | Principal Executive Officer, President, Chairman & Director |
Term of Office1& Length of Time Served: | Indefinite - Director since 1984; Vice President 1984 - 2003; President since 2004; |
| | Principal Executive Officer since 2002 |
| Principal Occupation(s) During Past 5 Years: | Executive Vice President; Co-Executive Director; Executive Group Member**; Chief |
| | Compliance Officer since 2004 - Manning & Napier Advisors, Inc. President; Director - |
| | Manning & Napier Investor Services, Inc. Holds or has held one or more of |
| | the following titles for various subsidiaries and affiliates: President, Vice President, |
| | Director, Chairman, Treasurer, Chief Compliance Officer or Member. |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| | |
INDEPENDENT DIRECTORS | |
| Name: | Stephen B. Ashley |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 66 |
| Current Position(s) Held with Fund: | Director, Audit Committee Member, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1996 |
| Principal Occupation(s) During Past 5 Years: | Chairman, Director, President & Chief Executive Officer, |
| | The Ashley Group (property management and investment) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | Genesee Corp. |
| | The Ashley Group |
| | Fannie Mae |
| | |
| Name: | Peter L. Faber |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 68 |
| Current Position(s) Held with Fund: | Director, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1987 |
| Principal Occupation(s) During Past 5 Years: | Senior Counsel, McDermott, Will & Emery LLP (law firm) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | Partnership for New York City, Inc. |
| | New York Collegium |
| Name: | Harris H. Rusitzky |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 72 |
| Current Position(s) Held with Fund: | Director, Audit Committee Member, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1985 |
| Principal Occupation(s) During Past 5 Years: | President, The Greening Group (business consultants); Partner, The Restaurant Group |
| | (restaurants) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
23
Directors' and Officers' Information (unaudited)
OFFICERS | |
| Name: | Jeffrey S. Coons, Ph.D., CFA |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 43 |
| Current Position(s) Held with Fund: | Vice President |
Term of Office1& Length of Time Served: | Since 2004 |
| Principal Occupation(s) During Past 5 Years: | Co-Director of Research since 2002 & Executive Group Member**, |
| | Manning & Napier Advisors, Inc. Managing Director - Risk Management, Manning & |
| | Napier Advisors, Inc., 1993-2002. Holds one or more of the following titles for various |
| | subsidiaries and affiliates: President, Director, Treasurer or Senior Trust Officer. |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Christine Glavin |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 40 |
| Current Position(s) Held with Fund: | Principal Financial Officer, Chief Financial Officer |
Term of Office1& Length of Time Served: | Principal Financial Officer since 2002; Chief Financial Officer since 2001 |
| Principal Occupation(s) During Past 5 Years: | Fund Accounting Manager, Manning & Napier Advisors, Inc. |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Jodi L. Hedberg |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 39 |
| Current Position(s) Held with Fund: | Corporate Secretary, Chief Compliance Officer, Anti-Money Laundering Compliance |
| | Officer |
Term of Office1& Length of Time Served: | Corporate Secretary since 1997; Chief Compliance Officer since 2004 |
| Principal Occupation(s) During Past 5 Years: | Director of Compliance, Manning & Napier Advisors, Inc. and affiliates; Corporate |
| | Secretary, Manning & Napier Investor Services, Inc. since 2006 |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Alaina V. Metz |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 39 |
| Current Position(s) Held with Fund: | Special Assistant Secretary |
| Term of Office & Length of Time Served: | Indefinite - Since 2002 |
| Principal Occupation(s) During Past 5 Years: | Vice President, BISYS Fund Services Ohio, Inc. (mutual fund servicing company) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
*Interested Director, within the meaning of the Investment Company Act of 1940 by reason of his position with the Fund's investment advisor and distributor. Mr. Auspitz serves as the Executive Vice President and Director, Manning & Napier Advisors, Inc. and President and Director, Manning & Napier Investor Services, Inc., the Fund's distributor.
**The Executive Group performs the duties of the Office of the Chief Executive of Manning & Napier Advisors, Inc.
1The term of office for President, Vice President, Chief Financial Officer, and Corporate Secretary is one year and until their respective successors are chosen and qualified. All other officers' terms are indefinite.
24
[THIS PAGE INTENTIONALLY LEFT BLANK]
25
Literature Requests (unaudited)
Proxy Voting Policies and Procedures
A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request:
By phone 1-800-466-3863
On the Securities and Exchange
Commission’s (SEC) web site http://www.sec.gov
Proxy Voting Record
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30th is available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
Quarterly Portfolio Holdings
The Series’ complete schedule of portfolio holdings for the 1st and 3rd quarters of each fiscal year are provided on Form N-Q, and are available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
The Series’ Form N-Q may be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
Prospectus and Statement of Additional Information (SAI)
The prospectus and SAI provide additional information about each Series, including charges, expenses and risks. These documents are available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
On the Advisor’s web site http://www.manningnapieradvisors.com
Additional information available at www.manningnapieradvisors.com
| 1. | Fund Holdings - Month-End |
| 2. | Fund Holdings - Quarter-End |
| 3. | Shareholder Report - Annual |
| 4. | Shareholder Report - Semi-Annual |
26
Manning & Napier Fund, Inc.
Core Plus Bond Series
Annual Report
December 31, 2006
Management Discussion and Analysis (unaudited)
Dear Shareholders:
Interest rates rise and interest rates fall; when they do, so too do the market prices of fixed income securities. The one difference, when interest rates rise, prices fall, and when interest rates fall, prices rise. Over the long-term, however, the total returns generated by most fixed income securities track their coupons, or more specifically, their yields to maturity.
Given the added risk associated with corporate bonds and mortgage-backed bonds, those fixed income securities traditionally carry higher coupons or yields than U.S. Treasury securities with similar maturities. So as one would expect, over the long-term, corporate bonds and mortgage-backed bonds have provided higher returns than U.S. Treasuries. That tendency is what triggered the activation of the Core Plus Bond Series back in April of 2005. What was interesting about 2006 is that this long-term tendency presented itself over a much shorter time period. Fixed income investors essentially earned their coupons over the past year; total returns tracked coupons pretty closely given the fact that interest rates at the end of the year were only modestly higher (about 30 basis points (i.e., 0.30%)) than where they were at the start of the year. In that environment, the Core Plus Bond Series performed relatively well in 2006.
The lone exception to the “modestly” higher description was short-term rates; 3-month U.S. Treasury bill yields rose almost a full percentage point during the year as the Federal Reserve (the “Fed”) pushed the targeted Fed Funds rate up from 4.25% at the start of the year to 5.25% at the end of June. The target remained the same throughout the remainder of the year.
During the first quarter of the year, the Fed raised the Fed Funds target because it was concerned about the inflationary effects of a run-up in commodity prices. Crude oil traded very close to $70 a barrel and the Commodity Research Bureau Raw Industrials Index rose more than 5% during the first three months of the year. The Fed was also concerned about the inflationary effects of the increases in “resource utilization,” primarily in the labor markets. The actions of the Fed and the economic environment pushed rates higher across the entire yield curve.
During the second quarter of the year, a modest acceleration in the rate of inflation showed up in the inflation measures themselves. At the end of May, the Consumer Price Index (CPI) was growing at a year over year rate of 4.1%, a bit faster than its 3.4% growth rate in December of 2005. Looking at the same measure in a slightly different fashion, the annualized growth rate through the first 5 months of 2006 was 5.1%. Through May, the CPI was only rising at an annualized rate of 3.6%.
Given the volatility associated with the food and energy components of the inflation indices, the “core” rate of inflation, the index excluding its food and energy components, has become increasingly important. During the second quarter, the core rate of inflation had also accelerated; it was up 2.4% year over year in May, slightly higher than its December reading of 2.2%. Unfortunately, the annualized readings were more troubling. Through the first five months of 2005, the core CPI measure annualized at a 2.4% rate; through the first five months of 2006, it was annualizing at 3.1%. Once again, interest rates moved higher across the entire yield curve.
Things began to change during the third quarter of the year with emerging signs that inflation pressures were receding. The Fed responded but left the Fed Funds target unchanged at both of its meetings during the quarter. The Fed was quite straightforward when it mentioned in its August press release that “inflation pressures seem likely to moderate over time, reflecting contained inflation expectations and the cumulative effects of monetary policy.” As for economic evidence of “the cumulative effects of monetary policy,” they were fairly widespread. Various indices related to economic growth rolled over during the quarter, and the Fed’s prior policy actions definitely played a role in the universally weak readings associated with the housing market. With the Fed on hold, short-term interest rates held steady, and intermediate- and longer-term interest rates moved sharply lower.
The Fed stayed on the same policy path during the fourth quarter, deciding at both of its meetings to leave the Fed Funds target unchanged. The reasoning remained the same, “inflation pressures seem likely to moderate over time.” However as the quarter progressed, there were subtle signs that the economic environment was holding just fine. The number of new jobs created each month grew throughout the quarter. The improving labor market, along with lower oil prices, translated into higher levels of consumer confidence. And as consumer spirits rose, same store sales picked back up after a miserable year over year reading in October. Short-term interest rates remained stable with the Fed on hold; after declining early in the quarter, longer-term rates retraced some of those gains as the year came to a close.
1
Management Discussion and Analysis (unaudited)
The yield spreads associated with corporate bonds and mortgage-backed securities narrowed in 2006; the tightening was more pronounced in the mortgage-backed sector of the market. That reflected an increase in demand, especially on the part of foreign buyers. In the corporate market, any tightening was a reflection of an aggregate improvement in corporate balance sheets and corporate credit quality. It was offset somewhat by a heightened concern about potential event risk(s).
As for the actual performance of the Core Plus Bond Series in 2006, it came in at 4.59%. That was better than the Merrill Lynch U.S. Domestic Master Index (which includes all U.S. Treasury, U.S. Agency, investment grade corporate bonds, and plain vanilla mortgage-backed securities with maturities of more than 1-year), which returned 4.32% in 2006. The modest outperformance can be traced to two factors, issue selection with the corporate sector and a heavier weighting in the mortgage-backed sector. Within the Series’ corporate holdings, certain issues performed better than the corporate bond market in general. Mortgages were the best performing investment grade sector in 2006; the Series carried a heavier weighting to this sector than the benchmark given our interest rate outlook and the more attractive relative value of the mortgage sector throughout the year.
Over the longer-term interest rates and spreads will fluctuate; sometimes the cyclical and/or policy pressures will push them both higher, sometimes they will push both lower, and other times, like last year, all of the various factors will be a bit of a wash. The key to investment success requires the investor to focus on the secular (non-cyclical) trends and the fundamental forces that drive each, an approach that we apply to all of our investment decisions.
We appreciate your business and wish you all the very best in the coming year.
Sincerely,
Manning & Napier Advisors, Inc.
2
Performance Update as of December 31, 2006 (unaudited)
| | Average Annual Total Returns |
| | As of December 31, 2006 |
| | One | Since |
| | Year | Inception1 |
| | | |
Manning & Napier Fund, Inc. - Core Plus Bond Series2 | 4.59% | 3.31% |
| | | |
Merrill Lynch U.S. Domestic Master Index3 | 4.32% | 3.73% |
The following graph compares the value of a $10,000 investment in the Manning & Napier Fund, Inc. - Core Plus Bond Series from its inception1 (4/21/05) to present (12/31/06) to the Merrill Lynch U.S. Domestic Master Index.
Data for line graph to follow:
| | Manning & Napier Fund, Inc. | Merrill Lynch |
| Date | Core Plus Bond Series2 | U.S. Domestic Master Index |
| 4/21/05 | $10,000 | $10,000 |
| 6/30/05 | 10,140 | 10,212 |
| 12/31/05 | 10,104 | 10,201 |
| 6/30/06 | 10,064 | 10,121 |
| 12/31/06 | 10,568 | 10,642 |
1Performance numbers for the Series and Index are calculated from April 21, 2005, the Series' inception date.
2The Series' performance does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. The Series' performance is historical and may not be indicative of future results.
3The unmanaged Merrill Lynch U.S. Domestic Master Index is a market value weighted measure that represents U.S. government, corporate, and pass-through securities issued by entities within the United States, by supranational entities, or by entities headquartered outside of the United States but who have issued dollar-denominated securities within the United States. The Index only includes investment grade securities with maturities of greater than one year. The Index returns assume reinvestment of coupons and, unlike Series returns, do not reflect any fees of expenses.
3
Shareholder Expense Example (unaudited)
As a shareholder of the Series, you may incur two types of costs: (1) transaction costs, including potential wire charges on redemptions and (2) ongoing costs, including management fees and other Series expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Series and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (July 1, 2006 to December 31, 2006).
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Series’ actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Series’ actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid during the period. You may use this information to compare the ongoing costs of investing in the Series and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transaction costs, such as potential wire charges on redemptions. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transaction costs were included, your costs would have been higher.
| | Beginning | Ending | Expenses Paid |
| | Account Value | Account Value | During Period* |
| | 7/1/06 | 12/31/06 | 7/1/06-12/31/06 |
| Actual | $1,000.00 | $1,050.10 | $4.24 |
| Hypothetical | | | |
| (5% return before expenses) | $1,000.00 | $1,021.07 | $4.18 |
*Expenses are equal to the Series’ annualized expense ratio (for the six-month period) of 0.82%, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). Expenses are based on the most recent fiscal half year; therefore, the expense ratio stated above may differ from the expense ratio stated in the financial highlights, which is based on one-year data.
4
Portfolio Composition as of December 31, 2006 (unaudited)
Data for pie chart to follow:
Sector Allocation1
| Consumer Discretionary | 9.22% |
| Consumer Staples | 0.73% |
| Energy | 2.64% |
| Financials | 8.55% |
| Health Care | 1.58% |
| Industrials | 7.03% |
| Information Technology | 1.52% |
| Materials | 0.72% |
| Utilities | 4.06% |
| Supranational Obligations | 0.72% |
| U.S. Government Agencies | 53.57% |
| Cash, short-term investments, and liabilities, less other assets | 9.66% |
1Including corporate bonds and foreign bonds, as a percentage of net assets.
Credit Quality Ratings2,3
| Aaa | 9.89% |
| Aa | 8.26% |
| A | 31.03% |
| Baa | 32.33% |
| Ba | 11.36% |
| B | 5.82% |
| Caa | 1.31% |
2As a percentage of total corporate bonds, foreign bonds, and supranational obligations.
3Based on ratings from Moody's, or the S&P equivalent . The Series may use different ratings provided by other rating agencies for purposes of determining compliance with the Series' investment policies.
5
Investment Portfolio - December 31, 2006
| | Credit | | |
| | Rating1 | Principal | Value |
| | (unaudited) | Amount | (Note 2) |
| | | | |
CORPORATE BONDS - 34.59% | | | |
Convertible Corporate Bonds - 3.87% | | | |
Consumer Discretionary - 0.71% | | | |
Hotels, Restaurants & Leisure - 0.71% | | | |
| Carnival Corp., 2.00%, 4/15/2021 | A3 | $1,250,000 | $1,600,000 |
| | | | |
Energy - 1.47% | | | |
Energy Equipment & Services - 1.47% | | | |
| Cooper Cameron Corp. (now known as Cameron International Corp.), 1.50%, 5/15/2024 | Baa1 | 695,000 | 1,116,344 |
| Pride International, Inc., 3.25%, 5/1/2033 | BB2 | 675,000 | 847,969 |
| Schlumberger Ltd., 1.50%, 6/1/2023 | A1 | 760,000 | 1,340,450 |
Total Energy | | | 3,304,763 |
| | | | |
Health Care - 0.23% | | | |
Pharmaceuticals - 0.23% | | | |
| Valeant Pharmaceuticals International, 4.00%, 11/15/2013 | B2 | 540,000 | 514,350 |
| | | | |
Industrials - 0.96% | | | |
Airlines - 0.48% | | | |
| JetBlue Airways Corp., 3.75%, 3/15/2035 | Caa1 | 1,000,000 | 1,077,500 |
| | | | |
Trading Companies & Distributors - 0.48% | | | |
| United Rentals North America, Inc., 1.875%, 10/15/2023 | B3 | 830,000 | 1,063,437 |
Total Industrials | | | 2,140,937 |
| | | | |
Utilities - 0.50% | | | |
Multi-Utilities - 0.50% | | | |
| Xcel Energy, Inc., 7.50%, 11/21/2007 | Baa1 | 595,000 | 1,117,112 |
| | | | |
Total Convertible Corporate Bonds | | | |
| (Identified Cost $7,986,581) | | | 8,677,162 |
| | | | |
Non-Convertible Corporate Bonds - 30.72% | | | |
Consumer Discretionary - 8.51% | | | |
Automobiles - 3.22% | | | |
| General Motors Acceptance Corp. LLC, 6.125%, 1/22/2008 | Ba1 | 7,240,000 | 7,224,137 |
| | | | |
Media - 3.64% | | | |
| AOL Time Warner (now known as Time Warner, Inc.), 7.625%, 4/15/2031 | Baa2 | 2,725,000 | 3,044,264 |
| Comcast Corp., 6.50%, 11/15/2035 | Baa2 | 3,105,000 | 3,126,931 |
| The Walt Disney Co., 7.00%, 3/1/2032 | A3 | 1,720,000 | 1,986,191 |
| | | | 8,157,386 |
| | | | |
Multiline Retail - 0.93% | | | |
| Target Corp., 5.875%, 3/1/2012 | A1 | 2,020,000 | 2,076,243 |
The accompanying notes are an integral part of the financial statements.
6
Investment Portfolio - December 31, 2006
| | Credit | | |
| | Rating1 | Principal | Value |
| | (unaudited) | Amount | (Note 2) |
| | | | |
CORPORATE BONDS (continued) | | | |
| | | | |
Non-Convertible Corporate Bonds (continued) | | | |
Consumer Discretionary (continued) | | | |
Specialty Retail - 0.72% | | | |
| Lowe's Companies, Inc., 8.25%, 6/1/2010 | A1 | $1,470,000 | $1,606,450 |
Total Consumer Discretionary | | | 19,064,216 |
| | | | |
Consumer Staples - 0.73% | | | |
Food & Staples Retailing - 0.72% | | | |
| The Kroger Co., 7.25%, 6/1/2009 | Baa2 | 775,000 | 804,658 |
| The Kroger Co., 6.80%, 4/1/2011 | Baa2 | 775,000 | 811,079 |
| | | | 1,615,737 |
| | | | |
Household Products - 0.01% | | | |
| The Procter & Gamble Co., 4.85%, 12/15/2015 | Aa3 | 25,000 | 24,120 |
Total Consumer Staples | | | 1,639,857 |
| | | | |
Energy - 1.17% | | | |
Oil, Gas & Consumable Fuels - 1.17% | | | |
| Anadarko Petroleum Corp., 5.95%, 9/15/2016 | Baa2 | 1,015,000 | 1,017,124 |
| Arch Western Finance, 6.75%, 7/1/2013 | B1 | 1,615,000 | 1,602,888 |
Total Energy | | | 2,620,012 |
| | | | |
Financials - 7.09% | | | |
Capital Markets - 1.88% | | | |
| The Goldman Sachs Group, Inc., 6.345%, 2/15/2034 | A1 | 1,920,000 | 1,943,518 |
| Lehman Brothers Holdings, Inc., 6.625%, 1/18/2012 | A1 | 1,155,000 | 1,220,359 |
| Merrill Lynch & Co., Inc., 6.05%, 5/16/2016 | A1 | 1,000,000 | 1,035,041 |
| | | | 4,198,918 |
| | | | |
Commercial Banks - 3.01% | | | |
| PNC Funding Corp., 7.50%, 11/1/2009 | A3 | 1,530,000 | 1,615,738 |
| U.S. Bank National Association, 6.375%, 8/1/2011 | Aa2 | 85,000 | 88,731 |
| Wachovia Corp., 5.25%, 8/1/2014 | A1 | 3,340,000 | 3,299,315 |
William Street Funding Corp.3,4,5, 5.58563%, 6/23/2012 | Aaa | 1,750,000 | 1,750,000 |
| | | | 6,753,784 |
| | | | |
Diversified Financial Services - 0.56% | | | |
| Citigroup, Inc., 5.00%, 9/15/2014 | Aa2 | 1,280,000 | 1,249,788 |
| | | | |
Insurance - 1.64% | | | |
| Ambac Financial Group, Inc., 5.95%, 12/5/2035 | Aa2 | 1,965,000 | 1,956,820 |
| American International Group, Inc., 4.25%, 5/15/2013 | Aa2 | 1,840,000 | 1,725,309 |
| | | | 3,682,129 |
Total Financials | | | 15,884,619 |
| | | | |
Health Care - 1.35% | | | |
Pharmaceuticals - 1.35% | | | |
| Abbott Laboratories, 3.50%, 2/17/2009 | A1 | 1,305,000 | 1,262,835 |
The accompanying notes are an integral part of the financial statements.
7
Investment Portfolio - December 31, 2006
| | Credit | | |
| | Rating1 | Principal | Value |
| | (unaudited) | Amount | (Note 2) |
| | | | |
CORPORATE BONDS (continued) | | | |
| | | | |
Non-Convertible Corporate Bonds (continued) | | | |
Health care (continued) | | | |
Pharmaceuticals (continued) | | | |
| Abbott Laboratories, 5.875%, 5/15/2016 | A1 | $500,000 | $515,016 |
Wyeth6, 5.50%, 3/15/2013 | A3 | 1,240,000 | 1,248,023 |
Total Health Care | | | 3,025,874 |
| | | | |
Industrials - 6.07% | | | |
Aerospace & Defense - 0.55% | | | |
| Boeing Capital Corp., 6.50%, 2/15/2012 | A2 | 1,175,000 | 1,238,897 |
| | | | |
Air Freight & Logistics - 0.56% | | | |
| FedEx Corp., 3.50%, 4/1/2009 | Baa2 | 1,310,000 | 1,258,179 |
| | | | |
Airlines - 1.13% | | | |
| Southwest Airlines Co., 5.25%, 10/1/2014 | Baa1 | 2,630,000 | 2,540,435 |
| | | | |
Industrial Conglomerates - 1.46% | | | |
| General Electric Capital Corp., 3.75%, 4/9/2008 (EUR) | Aaa | 1,215,000 | 1,597,923 |
| General Electric Capital Corp., 6.75%, 3/15/2032 | Aaa | 1,460,000 | 1,672,106 |
| | | | 3,270,029 |
| | | | |
Machinery - 0.54% | | | |
| John Deere Capital Corp., 7.00%, 3/15/2012 | A3 | 1,125,000 | 1,203,903 |
| | | | |
Road & Rail - 1.11% | | | |
| CSX Corp., 6.75%, 3/15/2011 | Baa2 | 1,585,000 | 1,664,239 |
| Union Pacific Corp., 6.65%, 1/15/2011 | Baa2 | 785,000 | 820,428 |
| | | | 2,484,667 |
| | | | |
Trading Companies & Distributors - 0.72% | | | |
| United Rentals North America, Inc., 7.00%, 2/15/2014 | B3 | 1,650,000 | 1,619,063 |
Total Industrials | | | 13,615,173 |
| | | | |
Information Technology - 1.52% | | | |
Communications Equipment - 1.52% | | | |
| Cisco Systems, Inc., 5.25%, 2/22/2011 | A1 | 775,000 | 776,944 |
| Corning, Inc., 6.20%, 3/15/2016 | Baa2 | 2,590,000 | 2,636,913 |
Total Information Technology | | | 3,413,857 |
| | | | |
Materials - 0.72% | | | |
Metals & Mining - 0.72% | | | |
| Alcoa, Inc., 7.375%, 8/1/2010 | A2 | 1,505,000 | 1,604,399 |
| | | | |
Utilities - 3.56% | | | |
Electric Utilities - 2.61% | | | |
Allegheny Energy Supply Co. LLC 4,7, 8.25%, 4/15/2012 | Ba3 | 1,180,000 | 1,295,050 |
| American Electric Power Co., Inc., 5.375%, 3/15/2010 | Baa2 | 1,275,000 | 1,273,819 |
| Exelon Generation Co. LLC, 5.35%, 1/15/2014 | Baa1 | 3,355,000 | 3,286,192 |
| | | | 5,855,061 |
The accompanying notes are an integral part of the financial statements.
8
Investment Portfolio - December 31, 2006
| | Credit | | |
| | Rating1 | Principal | Value |
| | (unaudited) | Amount | (Note 2) |
| | | | |
CORPORATE BONDS (continued) | | | |
| | | | |
Non-Convertible Corporate Bonds (continued) | | | |
Utilities (continued) | | | |
Independent Power Producers & Energy Traders - 0.54% | | | |
| TXU Energy Co., 7.00%, 3/15/2013 | Baa2 | $1,155,000 | $1,208,544 |
| | | | |
Multi-Utilities - 0.41% | | | |
| CenterPoint Energy Resources Corp., 7.875%, 4/1/2013 | Baa3 | 770,000 | 854,323 |
| Duke Energy Field Services LLC (now known as DCP Midstream LP), 7.875%, 8/16/2010 | Baa2 | 30,000 | 32,269 |
| Sempra Energy, 7.95%, 3/1/2010 | Baa1 | 30,000 | 32,186 |
| | | | 918,778 |
Total Utilities | | | 7,982,383 |
| | | | |
Total Non-Convertible Corporate Bonds | | | |
| (Identified Cost $69,166,742) | | | 68,850,390 |
| | | | |
TOTAL CORPORATE BONDS | | | |
| (Identified Cost $77,153,323) | | | 77,527,552 |
| | | | |
FOREIGN BONDS - 1.46% | | | |
Financials - 1.46% | | | |
Commercial Banks - 1.46% | | | |
| Depfa ACS Bank, 0.75%, 9/22/2008 (Ireland) (JPY) (Note 7) | Aaa | 180,000,000 | 1,512,737 |
| MBNA Europe Funding plc, 3.00%, 2/7/2008 (United Kingdom) (EUR) (Note 7) | Aa1 | 1,350,000 | 1,763,302 |
| | | | |
TOTAL FOREIGN BONDS | | | |
| (Identified Cost $3,259,829) | | | 3,276,039 |
| | | | |
SUPRANATIONAL OBLIGATIONS - 0.72% | | | |
| International Bank for Reconstruction and Development, 2.00%, 2/18/2008 (JPY) (Note 7) | | | |
| (Identified Cost $1,725,566) | Aaa | 190,000,000 | 1,618,598 |
| | | | |
U.S. GOVERNMENT AGENCIES - 53.57% | | | |
Mortgage-Backed Securities - 50.86% | | | |
| Fannie Mae, Pool #244510, 5.50%, 12/1/2008 | | 7,189 | 7,179 |
| Fannie Mae, Pool #190549, 5.50%, 1/1/2009 | | 8,771 | 8,763 |
| Fannie Mae, Pool #50972, 5.50%, 1/1/2009 | | 8,614 | 8,602 |
| Fannie Mae, Pool #663794, 5.50%, 9/1/2017 | | 138,016 | 138,345 |
| Fannie Mae, Pool #555389, 5.50%, 4/1/2018 | | 556,584 | 557,912 |
| Fannie Mae, Pool #697020, 5.50%, 5/1/2018 | | 43,837 | 43,921 |
| Fannie Mae, Pool #741610, 5.50%, 9/1/2018 | | 435,608 | 436,440 |
| Fannie Mae, Pool #761280, 5.50%, 2/1/2019 | | 134,534 | 134,631 |
| Fannie Mae, Pool #725793, 5.50%, 9/1/2019 | | 632,503 | 633,711 |
| Fannie Mae, Pool #741552, 6.50%, 9/1/2033 | | 567,455 | 579,319 |
| Fannie Mae, Pool #747607, 6.50%, 11/1/2033 | | 90,685 | 92,581 |
| Fannie Mae, Pool #776452, 6.50%, 1/1/2034 | | 45,931 | 46,892 |
| Fannie Mae, Pool #765848, 6.50%, 2/1/2034 | | 70,508 | 71,905 |
The accompanying notes are an integral part of the financial statements.
9
Investment Portfolio - December 31, 2006
| | Principal | Value |
| | Amount | (Note 2) |
| | | |
U.S. GOVERNMENT AGENCIES (continued) | | |
Mortgage-Backed Securities (continued) | | |
| Fannie Mae, Pool #766304, 6.50%, 3/1/2034 | $69,811 | $71,195 |
| Fannie Mae, Pool #725686, 6.50%, 7/1/2034 | 159,190 | 162,838 |
| Fannie Mae, Pool #782769, 6.50%, 7/1/2034 | 640,342 | 653,030 |
| Fannie Mae, Pool #786281, 6.50%, 7/1/2034 | 49,317 | 50,294 |
| Fannie Mae, Pool #786692, 6.50%, 8/1/2034 | 62,037 | 63,266 |
| Fannie Mae, Pool #799657, 6.50%, 11/1/2034 | 403,034 | 411,021 |
| Fannie Mae, Pool #812185, 4.50%, 2/1/2035 | 433,322 | 406,185 |
| Fannie Mae, Pool #815409, 4.50%, 2/1/2035 | 215,673 | 202,167 |
| Fannie Mae, Pool #815926, 4.50%, 4/1/2035 | 973,221 | 912,274 |
Fannie Mae, TBA8, 5.00%, 1/15/2022 | 6,055,000 | 5,950,927 |
Fannie Mae, TBA8, 4.50%, 2/15/2022 | 7,284,000 | 7,022,228 |
Fannie Mae, TBA8, 5.00%, 1/15/2037 | 13,037,000 | 12,584,772 |
Fannie Mae, TBA8, 5.50%, 1/15/2037 | 20,029,000 | 19,791,156 |
Fannie Mae, TBA8, 6.00%, 1/15/2037 | 7,683,000 | 7,733,416 |
| Federal Home Loan Mortgage Corp., Pool #M90974, 4.50%, 3/1/2010 | 530,220 | 521,326 |
| Federal Home Loan Mortgage Corp., Pool #E00593, 5.50%, 11/1/2013 | 17,580 | 17,645 |
| Federal Home Loan Mortgage Corp., Pool #E91213, 5.50%, 9/1/2017 | 81,947 | 82,086 |
| Federal Home Loan Mortgage Corp., Pool #B11112, 5.50%, 11/1/2018 | 497,203 | 497,832 |
| Federal Home Loan Mortgage Corp., Pool #B11862, 5.50%, 1/1/2019 | 238,459 | 238,760 |
| Federal Home Loan Mortgage Corp., Pool #B16144, 5.50%, 8/1/2019 | 161,999 | 162,027 |
| Federal Home Loan Mortgage Corp., Pool #B16835, 5.50%, 10/1/2019 | 1,201,391 | 1,201,603 |
| Federal Home Loan Mortgage Corp., Pool #815122, 5.50%, 4/1/2020 | 166,834 | 166,805 |
| Federal Home Loan Mortgage Corp., Pool #A22067, 6.50%, 5/1/2034 | 11,898 | 12,130 |
| Federal Home Loan Mortgage Corp., Pool #A25775, 6.50%, 8/1/2034 | 676,884 | 690,093 |
| Federal Home Loan Mortgage Corp., Pool #G01741, 6.50%, 10/1/2034 | 585,951 | 599,115 |
| Federal Home Loan Mortgage Corp., Pool #G01782, 6.50%, 2/1/2035 | 485,404 | 495,425 |
Federal Home Loan Mortgage Corp., TBA8, 5.00%, 2/15/2022 | 4,961,000 | 4,871,082 |
Federal Home Loan Mortgage Corp., TBA8, 4.50%, 3/15/2022 | 7,901,000 | 7,607,178 |
The accompanying notes are an integral part of the financial statements.
10
Investment Portfolio - December 31, 2006
| | Principal Amount/ | Value |
| | Shares | (Note 2) |
| | | |
U.S. GOVERNMENT AGENCIES (continued) | | |
Mortgage-Backed Securities (continued) | | |
Federal Home Loan Mortgage Corp., TBA8, 5.00%, 1/15/2037 | $9,066,000 | $8,745,861 |
Federal Home Loan Mortgage Corp., TBA8, 5.50%, 1/15/2037 | 11,680,000 | 11,548,600 |
Federal Home Loan Mortgage Corp., TBA8, 6.00%, 1/15/2037 | 4,296,000 | 4,326,880 |
| GNMA, Pool #487193, 5.00%, 4/15/2020 | 654,078 | 645,881 |
| GNMA, Pool #563559, 6.50%, 4/15/2032 | 672,097 | 690,510 |
| GNMA, Pool #552765, 6.50%, 9/15/2032 | 830,243 | 852,988 |
GNMA, TBA8, 5.50%, 1/15/2037 | 5,368,000 | 5,341,160 |
GNMA, TBA8, 6.00%, 1/15/2037 | 3,237,000 | 3,281,509 |
GNMA, TBA8, 5.00%, 2/15/2037 | 2,701,000 | 2,625,880 |
| | | |
Total Mortgage-Backed Securities | | |
| (Identified Cost $114,960,620) | | 113,997,346 |
| | | |
Other Agencies - 2.71% | | |
| Federal Home Loan Mortgage Corp., 6.25%, 7/15/2032 | | |
| (Identified Cost $5,753,666) | 5,275,000 | 6,070,734 |
| | | |
TOTAL U.S. GOVERNMENT AGENCIES | | |
| (Identified Cost $120,714,286) | | 120,068,080 |
| | | |
SHORT-TERM INVESTMENTS - 54.37% | | |
| Dreyfus Treasury Cash Management - Institutional Shares | 5,750,121 | 5,750,121 |
| Fannie Mae Discount Note, 1/10/2007 | $60,000,000 | 59,922,750 |
| Fannie Mae Discount Note, 1/12/2007 | 9,500,000 | 9,483,760 |
| Fannie Mae Discount Note, 1/16/2007 | 5,000,000 | 4,988,764 |
| Fannie Mae Discount Note, 2/14/2007 | 9,000,000 | 8,945,232 |
| Federal Home Loan Bank Discount Note, 1/10/2007 | 4,000,000 | 3,994,850 |
| Federal Home Loan Bank Discount Note, 1/19/2007 | 4,500,000 | 4,488,480 |
| Federal Home Loan Bank Discount Note, 1/30/2007 | 3,000,000 | 2,987,554 |
| Federal Home Loan Bank Discount Note, 2/9/2007 | 6,000,000 | 5,966,231 |
| Federal Home Loan Bank Discount Note, 3/16/2007 | 8,000,000 | 7,918,080 |
| Freddie Mac Discount Note, 3/13/2007 | 7,500,000 | 7,426,403 |
| | | |
TOTAL SHORT-TERM INVESTMENTS | | |
| (Identified Cost $121,868,384) | | 121,872,225 |
| | | |
TOTAL INVESTMENTS - 144.71% | | |
| (Identified Cost $324,721,388) | | 324,362,494 |
| | | |
LIABILITIES, LESS OTHER ASSETS - (44.71%) | | (100,217,700) |
| | | |
NET ASSETS - 100% | | $224,144,794 |
The accompanying notes are an integral part of the financial statements.
11
Investment Portfolio - December 31, 2006
1Credit ratings from Moody's (unaudited).
2Credit ratings from S&P (unaudited).
3The coupon rate is a floating rate and is subject to change quarterly. The coupon rate stated is the rate as of December 31, 2006.
4Restricted securities - Investment in securities that are restricted as to public resale under the Securities Act of 1933, as amended. These securities amount to $3,045,050, or 1.4%, of the Series' net assets as of December 31, 2006.
5This security was acquired on June 22, 2006 at a cost of $1,750,000 ($100.00 per share) and has been determined to be illiquid under guidelines established by the Board of Directors.
6The coupon rate will increase with every ratings downgrade and decrease with every ratings upgrade. The coupon rate stated is the rate as of December 31, 2006.
7This security has been sold under rule 144A and has been determined to be liquid under guidelines established by the Board of Directors.
8Securities purchased on a forward commitment or when-issued basis. TBA - to be announced.
The accompanying notes are an integral part of the financial statements.
12
Statement of Assets and Liabilities
December 31, 2006
ASSETS: | |
| | |
| Investments, at value (identified cost, $324,721,388) (Note 2) | $324,362,494 |
| Foreign currency, at value (cost $80,850) | 79,565 |
| Interest receivable | 1,747,336 |
| Receivable for fund shares sold | 635,141 |
| Dividends receivable | 26,048 |
| | |
| TOTAL ASSETS | 326,850,584 |
| | |
LIABILITIES: | |
| | |
| Accrued management fees (Note 3) | 132,611 |
| Accrued fund accounting and transfer agent fees (Note 3) | 14,239 |
| Accrued Chief Compliance Officer service fees (Note 3) | 437 |
| Accrued directors' fees (Note 3) | 206 |
| Payable for purchases of delayed delivery securities (Note 2) | 102,315,821 |
| Payable for fund shares repurchased | 212,795 |
| Audit fees payable | 26,733 |
| Other payables and accrued expenses | 2,948 |
| | |
| TOTAL LIABILITIES | 102,705,790 |
| | |
TOTAL NET ASSETS | $224,144,794 |
| | |
NET ASSETS CONSIST OF: | |
| | |
| Capital stock | $224,703 |
| Additional paid-in-capital | 224,460,482 |
| Accumulated net realized loss on investments, foreign currency, and other assets and liabilities | (182,764) |
| Net unrealized depreciation on investments, foreign currency, and other assets and liabilities | (357,627) |
| | |
TOTAL NET ASSETS | $224,144,794 |
| | |
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE ($224,144,794/22,470,293 shares) | $9.98 |
The accompanying notes are an integral part of the financial statements.
13
For the Year Ended December 31, 2006
INVESTMENT INCOME: | |
| | |
| Interest | $9,288,856 |
| Dividends | 259,139 |
| | |
| Total Investment Income | 9,547,995 |
| | |
EXPENSES: | |
| | |
| Management fees (Note 3) | 1,396,362 |
| Fund accounting and transfer agent fees (Note 3) | 173,893 |
| Directors' fees (Note 3) | 7,050 |
| Chief Compliance Officer service fees (Note 3) | 6,049 |
| Custodian fees | 15,500 |
| Miscellaneous | 63,967 |
| | |
| Total Expenses | 1,662,821 |
| | |
| NET INVESTMENT INCOME | 7,885,174 |
| | |
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: | |
| | |
| Net realized gain (loss) on - | |
| Investments | 1,098,165 |
| Foreign currency and other assets and liabilities | (76,382) |
| | 1,021,783 |
| | |
| Net change in unrealized depreciation on - | |
| Investments | 295,078 |
| Foreign currency and other assets and liabilities | 1,267 |
| | 296,345 |
| | |
| NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS | 1,318,128 |
| | |
| NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS | $9,203,302 |
The accompanying notes are an integral part of the financial statements.
14
Statements of Changes in Net Assets
| | For the | For the Period |
| | Year Ended | 4/21/051 to |
| | 12/31/06 | 12/31/05 |
| | | |
INCREASE (DECREASE) IN NET ASSETS: | | |
| | | |
OPERATIONS: | | |
| | | |
| Net investment income | $7,885,174 | $3,730,929 |
| Net realized gain (loss) on investments and foreign currency | 1,021,783 | (1,280,929) |
| Net change in unrealized depreciation on investments and foreign currency | 296,345 | (653,972) |
| | | |
| Net increase from operations | 9,203,302 | 1,796,028 |
| | | |
DISTRIBUTIONS TO SHAREHOLDERS (Note 8): | | |
| | | |
| From net investment income | (7,841,271) | (3,700,853) |
| | | |
CAPITAL STOCK ISSUED AND REPURCHASED: | | |
| | | |
| Net increase from capital share transactions (Note 5) | 47,188,672 | 177,498,916 |
| | | |
| Net increase in net assets | 48,550,703 | 175,594,091 |
| | | |
NET ASSETS: | | |
| | | |
| Beginning of period | 175,594,091 | - |
| | | |
End of period (including undistributed net investment income of $0 and $30,076, respectively) | $224,144,794 | $175,594,091 |
1Commencement of operations.
The accompanying notes are an integral part of the financial statements.
15
| | For the | For the Period |
| | Year Ended | 4/21/051 to |
| | 12/31/06 | 12/31/05 |
| | | |
Per share data (for a share outstanding throughout | | |
each period): | | |
| | | |
Net asset value - Beginning of period | $9.89 | $10.00 |
| | | |
| Income (loss) from investment operations: | | |
| Net investment income | 0.37 | 0.22 |
| Net realized and unrealized gain (loss) on investments | 0.08 | (0.12) |
| | | |
| Total from investment operations | 0.45 | 0.10 |
| | | |
| Less distributions to shareholders: | | |
| From net investment income | (0.36) | (0.21) |
| | | |
Net asset value - End of period | $9.98 | $9.89 |
| | | |
Total return2 | 4.59% | 1.04% |
| | | |
Ratios (to average net assets)/Supplemental Data: | | |
| Expenses | 0.83% | 0.88%3 |
| Net investment income | 3.95% | 3.12%3 |
| | | |
| Portfolio turnover | 315% | 290% |
| | | |
Net assets - End of period (000's omitted) | $224,145 | $175,594 |
1Commencement of operations.
2Represents aggregate total return for the period indicated, and assumes reinvestment of all distributions. Periods less than one year are not annualized.
3Annualized.
The accompanying notes are an integral part of the financial statements.
16
Notes to Financial Statements
1. ORGANIZATION
Core Plus Bond Series (the "Series") is a no-load non-diversified series of Manning & Napier Fund, Inc. (the "Fund"), formerly Exeter Fund, Inc. The Fund is organized in Maryland and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company.
The Series' investment objective is to provide long-term total return by investing primarily in bonds and other financial instruments, including derivatives, with economic characteristics similar to bonds.
The Fund’s Advisor is Manning & Napier Advisors, Inc. (the “Advisor”). Shares of the Series are offered to investors, clients and employees of the Advisor and its affiliates. The total authorized capital stock of the Fund consists of 1.7 billion shares of common stock each having a par value of $0.01. As of December 31, 2006, 1.16 billion shares have been designated in total among 21 series, of which 75 million have been designated as Core Plus Bond Series Class A common stock.
2. SIGNIFICANT ACCOUNTING POLICIES
Security Valuation
Debt securities, including government bonds, foreign bonds, supranational obligations, sovereign bonds, corporate bonds and mortgage-backed securities, will normally be valued on the basis of evaluated bid prices provided by the Fund’s pricing service.
Securities for which representative valuations or prices are not available from the Fund's pricing service may be valued at fair value. If trading or events occurring after the close of the principal market in which securities are traded are expected to materially affect the value of those securities, then they may be valued at their fair value, taking this trading or these events into account. Fair value is determined in good faith by the Advisor under procedures approved by and under the general supervision and responsibility of the Fund’s Board of Directors (the “Board”).
Short-term investments that mature in sixty days or less are valued at amortized cost, which approximates market value. Investments in open-end investment companies are valued at their net asset value per share on valuation date.
Security Transactions, Investment Income and Expenses
Security transactions are accounted for on trade date. Interest income, including amortization of premium and accretion of discounts using the effective interest method, is earned from settlement date and accrued daily. Dividend income and expenses are recorded on an accrual basis.
Most expenses of the Fund can be attributed to a specific series. Expenses which cannot be directly attributed are apportioned among the series in the Fund in such a manner as deemed equitable by the Fund's Board, taking into consideration, among other things, the nature and type of expense.
The Series uses the identified cost method for determining realized gain or loss on investments for both financial statement and federal income tax reporting purposes.
Foreign Currency Translation
The books and records of the Series are maintained in U.S. dollars. Foreign currencies, investments and other assets and liabilities are translated into U.S. dollars at the current exchange rates.
17
Notes to Financial Statements
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Foreign Currency Translation (continued)
Purchases and sales of investment securities and income and expenses are translated on the respective dates of such transactions. The Series does not isolate realized and unrealized gains and losses attributable to changes in the exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized foreign currency gains and losses represent foreign currency gains and losses between trade date and settlement date on securities transactions, gains and losses on disposition of foreign currencies and the difference between the amount of income and foreign withholding taxes recorded on the books of the Series and the amounts actually received or paid.
Securities Purchased on a When-Issued Basis or Forward Commitment
The Series may purchase securities on a when-issued basis or forward commitment. These transactions involve a commitment by the Series to purchase securities for a predetermined price with payment and delivery taking place beyond the customary settlement period. When such purchases are outstanding, the Series will designate liquid assets in an amount sufficient to meet the purchase price. When purchasing a security on a delayed delivery basis, the Series assumes the rights and risks of ownership of the security, including the risk of price and yield fluctuations, and takes such fluctuations into account when determining its net asset value. The Series may sell the when-issued securities before they are delivered, which may result in a capital gain or loss.
In connection with its ability to purchase or sell securities on a forward commitment basis, the Series may enter into forward roll transactions principally using To Be Announced (TBA) securities. Forward roll transactions require the sale of securities for delivery in the current month, and a simultaneous agreement to repurchase substantially similar (same type, coupon and maturity) securities on a specified future date. Risks of entering into forward roll transactions include the potential inability of the counterparty to meet the terms of the agreement; the potential of the Series to receive inferior securities at redelivery as compared to the securities sold to the counterparty; counterparty credit risk; and the potential pay down speed variance between the mortgage-backed pools. During the roll period, the Series forgoes principal and interest paid on the securities. The Series accounts for such dollar rolls as purchases and sales. The Series had TBA dollar rolls outstanding as of December 31, 2006, which are included in Payable for Purchases of Delayed Delivery Securities on the Statement of Assets and Liabilities.
Restricted Securities
Restricted securities are purchased in private placement transactions, are not registered under the Securities Act of 1933, as amended, and may have contractual restrictions on resale. Information regarding restricted securities is included at the end of the Series’ Investment Portfolio.
Illiquid Securities
A security may be considered illiquid if so deemed in good faith by the Advisor under procedures approved by and under the general supervision and responsibility of the Fund’s Board. Securities that are illiquid are marked with the applicable footnote on the Investment Portfolio.
Federal Taxes
The Series' policy is to comply with the provisions of the Internal Revenue Code applicable to regulated investment companies. The Series is not subject to federal income or excise tax to the extent that the Series distributes to shareholders each year its taxable income, including any net realized gains on investments, in accordance with requirements of the Internal Revenue Code. Accordingly, no provision for federal income tax or excise tax has been made in the financial statements.
18
Notes to Financial Statements
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Distributions of Income and Gains
Distributions to shareholders of net investment income and net realized gains are made annually. An additional distribution may be necessary to avoid taxation of the Series. Distributions are recorded on the ex-dividend date.
Indemnifications
The Fund’s organizational documents provide former and current directors and officers with a limited indemnification against liabilities arising in connection with the performance of their duties to the Fund. In the normal course of business, the Fund may also enter into contracts that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown as this would be dependent on future claims that may be made against the Fund. The risk of material loss from such claims is considered remote.
Other
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
3. TRANSACTIONS WITH AFFILIATES
The Fund has an Investment Advisory Agreement (the “Agreement”) with the Advisor, for which the Series pays a fee, computed daily and payable monthly, at an annual rate of 0.70% of the Series’ average daily net assets.
Under the Agreement, personnel of the Advisor provide the Series with advice and assistance in the choice of investments and the execution of securities transactions, and otherwise maintain the Series’ organization. The Advisor also provides the Fund with necessary office space and fund administration and support services. The salaries of all officers of the Fund (except a percentage of the Fund’s Chief Compliance Officer’s salary, which is paid by the Fund, and the Special Assistant Secretary’s salary, which is paid by BISYS Fund Services Ohio, Inc. (“BISYS”)), and of all Directors who are "affiliated persons" of the Fund, or of the Advisor, and all personnel of the Fund, or of the Advisor, performing services relating to research, statistical and investment activities, are paid by the Advisor. Each "non-affiliated" Director receives an annual stipend, which is allocated among all the active series of the Fund. In addition, these Directors also receive a fee per Board meeting attended for each active series of the Fund plus a fee for each committee meeting attended.
The Advisor has contractually agreed, until at least April 30, 2008, to waive its fee and, if necessary, pay other operating expenses of the Series in order to maintain total expenses for the Series at no more than 0.90% of average daily net assets each year. For the year ended December 31, 2006, the Advisor did not waive its management fee or reimburse any expenses of the Series. The Advisor is not eligible to recoup any expenses that have been waived or reimbursed in prior years.
Manning & Napier Investor Services, Inc., a registered broker-dealer affiliate of the Advisor, acts as distributor for the Fund's shares. The services of Manning & Napier Investor Services, Inc. are provided at no additional cost to the Series.
19
Notes to Financial Statements
3. TRANSACTIONS WITH AFFILIATES (continued)
For fund accounting and transfer agent services, through October 31, 2006, the Fund paid the Advisor an annual fee of 0.12% of the Fund’s average daily net assets up to $900 million, 0.09% of the Fund’s average daily net assets between $900 million and $1.5 billion, and 0.05% of the Fund’s average daily net assets over $1.5 billion. Effective November 1, 2006, the fee rates were reduced as follows: 0.11% of the Fund’s average daily net assets up to $900 million, 0.07% of the Fund’s average daily net assets between $900 million and $1.5 billion, and 0.04% of the Fund’s average daily net assets over $1.5 billion. Additionally, certain transaction and account-based fees and out-of-pocket expenses, including charges for reporting relating to the Fund’s compliance program, are charged. Expenses not directly attributable to a series are allocated based on each series’ relative net assets or number of accounts, depending on the expense. The Advisor has an agreement with BISYS under which BISYS serves as sub-accounting services and sub-transfer agent.
4. PURCHASES AND SALES OF SECURITIES
For the year ended December 31, 2006, purchases and sales of securities, other than United States Government securities and short-term securities, were $60,166,115 and $46,990,395, respectively. Purchases and sales of United States Government securities, other than short-term securities, were $552,106,080 and $529,792,321, respectively.
5. CAPITAL STOCK TRANSACTIONS
Transactions in shares of Core Plus Bond Series were:
| | | For the period 4/21/05 |
| | For the Year | (commencement of operations) |
| | Ended 12/31/06 | to 12/31/05 |
| | Shares | Amount | Shares | Amount |
| Sold | 4,918,606 | $49,160,159 | 18,018,997 | $180,249,999 |
| Reinvested | 767,956 | 7,681,140 | 366,846 | 3,613,437 |
| Repurchased | (968,235) | (9,652,627) | (633,877) | (6,364,520) |
| Total | 4,718,327 | $47,188,672 | 17,751,966 | $177,498,916 |
Substantially all of the Series’ shares represent investments by fiduciary accounts over which the Advisor has sole investment discretion.
6. FINANCIAL INSTRUMENTS
The Series may trade in financial instruments with off-balance sheet risk in the normal course of its investing activities to assist in managing exposure to various market risks. These financial instruments include written options, forward foreign currency exchange contracts and futures contracts and may involve, to a varying degree, elements of risk in excess of the amounts recognized for financial statement purposes. No such investments were held by the Series on December 31, 2006.
20
Notes to Financial Statements
7. FOREIGN SECURITIES
Investing in securities of foreign companies and foreign governments involves special risks and considerations not typically associated with investing in securities of domestic companies and the United States Government. These risks include revaluation of currencies and future adverse political and economic developments. Moreover, securities of foreign companies and foreign governments and their markets may be less liquid and their prices more volatile than those of comparable domestic companies and the United States Government.
8. FEDERAL INCOME TAX INFORMATION
The amount and characterization of certain income and capital gains to be distributed are determined in accordance with federal income tax regulations, which may differ from accounting principles generally accepted in the United States of America. These differences are primarily due to differing book and tax treatments in the timing of the recognition of net investment income or gains and losses, including foreign currency gains and losses and Post-October losses. The Series may periodically make reclassifications among its capital accounts to reflect income and gains available for distribution (or available capital loss carryovers) under income tax regulations, without impacting the Series' net asset value. Any such reclassifications are not reflected in the financial highlights.
The tax character of distributions paid were as follows:
| | | For the Period 4/21/05 |
| | For the Year | (commencement of |
| | Ended 12/31/06 | operations) to 12/31/05 |
| | | |
| Ordinary income | $7,841,271 | $3,700,853 |
For the year ended December 31, 2006, the Series elected to defer $67,185 of capital losses attributable to Post-October losses.
At December 31, 2006, the tax basis components of distributable earnings and the net unrealized depreciation based on identified cost for federal income tax purposes were as follows:
| Cost for federal income tax purposes | $324,721,388 |
| | |
| Unrealized appreciation | $1,811,761 |
| Unrealized depreciation | (2,170,655) |
| | |
| Net unrealized depreciation | $(358,894) |
| Capital loss carryover | 115,579 |
The capital loss carryover, disclosed above, available to the extent allowed by tax law to offset future net capital gain, if any, will expire on December 31, 2013.
9. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement 109. FIN 48 supplements FASB Statement 109, Accounting for Income Taxes, by defining the confidence level that a tax position must meet in order to be recognized in the financial statements. FIN 48 provides guidance for how a fund should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the fund has taken
21
Notes to Financial Statements
9. RECENT ACCOUNTING PRONOUNCEMENTS (continued)
or expects to take on a tax return. FIN 48 requires that the tax effects of a position be recognized only if it is “more likely than not” to be sustained based solely on its technical merits. Tax positions not deemed to meet the more likely than not threshold would be recorded as a tax benefit or expense in the current year. FIN 48 needs to be implemented no later than the first required financial statement reporting period for its fiscal year beginning after December 15, 2006 and is to be applied to all open tax years as of the effective date. At adoption, the financial statements must be adjusted to reflect only those tax positions that are more likely than not to be sustained as of the adoption date. Management of the Fund is currently evaluating the impact that FIN 48 will have on the Series' financial statements.
In addition, in September 2006, FASB Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“FAS 157”) was issued, and is effective for fiscal years beginning after November 15, 2007. FAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosure about fair value measurements. The standard does not expand the use of fair value in any new circumstances, but provides clarification on acceptable fair value methods and applications. At this time, management is evaluating the implications of FAS 157, but it is not expected to materially impact the Series’ financial statements.
22
Report of Independent Registered Public Accounting Firm
To the Board of Directors of Manning & Napier Fund, Inc. and Shareholders of Core Plus Bond Series:
In our opinion, the accompanying statement of assets and liabilities, including the investment portfolio (except for credit ratings), and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the Core Plus Bond Series (a series of Manning & Napier Fund, Inc., hereafter referred to as the "Series") at December 31, 2006, and the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Series’ management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Columbus, Ohio
February 9, 2007
23
Renewal of Investment Advisory Agreement (unaudited)
At the Manning & Napier Fund, Inc. (the “Fund”) Board of Directors’ (the “Board”) annual in-person meeting, held on November 16, 2006, the Investment Advisory Agreement (the “Agreement”) between the Fund and Manning & Napier Advisors, Inc. (the “Advisor”) was reviewed by the Board for renewal. In connection with the decision whether to renew the Agreement, a variety of material was prepared for and reviewed by the Board. In addition, at the meeting of the Board, representatives of the Advisor presented additional oral and written information to help the Board evaluate the Advisor’s performance under the Agreement over the previous year. The Board then deliberated on the renewal of the Agreement in light of the various material provided prior to and at the meeting.
In connection with its review and deliberations, the Board considered the following factors and reached a conclusion with respect to such factors.
| · | The Board considered the services provided by the Advisor under the Agreement including, among others: deciding what securities to purchase and sell for each Series; arranging for the purchase and sale of such securities by placing orders with broker-dealers; administering the affairs of the Fund (including the books and records of the Fund not maintained by third party service providers such as the custodian or sub-transfer agent); arranging for the insurance coverage for the Fund; and supervising the preparation of tax returns, SEC filings (including registration statements) and reports to shareholders for the Fund. The Board discussed the quality of these services with representatives from the Advisor and concluded that the Advisor was performing its services to the Fund required under the Agreement in a reasonable manner. |
| · | The Board considered the investment performance of the various Series of the Fund. The investment performance for each Series was reviewed on a cumulative basis since inception and on a one year basis. In addition, annualized peformance for the following time periods was considered: inception, three year, five year, ten year, and current market cycle. A market cycle includes periods of both rising and falling markets. Returns for established benchmark indices for each Series were provided for each time period. In addition, the Board considered at the meeting (and considers on a quarterly basis) a peer group performance analysis consisting of Morningstar universes of mutual funds with similar investment objectives. The Board discussed the performance with representatives from the Advisor and concluded that the investment performance of each of the Fund’s Series was reasonable based on the Fund’s actual performance and comparative performance, especially performance over the current market cycle. |
| · | The Board considered the costs of the Advisor’s services and the profits of the Advisor as they relate to the Advisor’s services to the Fund under the Agreement. In reviewing the Advisor’s costs and profits, the Board discussed the Advisor’s revenues generated from the Fund (on both an actual and adjusted basis) and its expenses associated with providing the services under the Agreement. In addition, the Board reviewed the Advisor’s expenses associated with Fund activities outside of the Agreement (such as expense reimbursements pursuant to expense caps and payments made by the Advisor to third party platforms on which shares of the Fund are available for purchase). It was noted by representatives of the Advisor that 6 of the 18 active Series of the Fund are currently experiencing expenses above the capped expense ratios. After discussing the above costs and profits, the Board concluded that the Advisor’s profitability relating to its services provided under the Agreement is reasonable. |
| · | The Board considered the fees and expenses of the various Series of the Fund. The Advisor presented the advisory fees and total expenses for each Series, including the advisory fee adjusted for any expense waivers or reimbursements (either contractual or voluntary) paid by the Advisor. The advisory fees and expense ratios of each Series were compared to an average (on both a mean and median basis) of similar funds as disclosed on the Morningstar database. Representatives of the Advisor discussed with the Board the levels of its advisory fee for each Series of the Fund and as compared to the median and mean advisory fees for similar funds as listed on Morningstar. Expense ratios for every Series, except the High Yield Bond Series, are currently below the median and mean for similar funds as listed on Morningstar. Based on their review of the information provided, the Board concluded that the fees and expenses of each Series of the Fund were reasonable on a comparative basis. |
24
Renewal of Investment Advisory Agreement (unaudited)
| · | The Board also considered the other benefits the Advisor derives from its relationship with the Fund. Such other benefits include certain research products provided by soft dollars. Given the level of soft dollar transactions involving the Fund, the Board concluded that these additional benefits to the Advisor were reasonable. |
| · | In addition to the factors described above, the Board considered the Advisor’s personnel, the Advisor’s investment strategies, the Advisor’s policies and procedures relating to compliance with personal securities transactions, and the Advisor’s reputation, expertise and resources in domestic and foreign financial markets. The Board concluded that these factors support the conclusion that the Advisor performs its services in a reasonable manner. |
| · | The Board did not consider economies of scale at this time because of the multiple uses of the Fund (for the Advisor’s discretionary investment account clients in addition to direct investors), the current profitability of the Advisor’s services to the Fund under the Agreement, and the overall size of the Fund complex. |
Based on the Board’s conclusions regarding the factors described above, the Board, including a majority of Directors that are “not interested” as defined in the Investment Company Act of 1940, approved the renewal of the Agreement for another year. In the course of their deliberations, the Directors did not identify any particular information that was all important or controlling.
25
Directors’ and Officers’ Information (unaudited)
The Statement of Additional Information provides additional information about the Fund's directors and officers and can be obtained without charge by calling 1-800-466-3863, at www.manningnapieradvisors.com, or on the EDGAR Database on the SEC Internet web site (http:\\www.sec.gov). The following chart shows certain information about the Fund's officers and directors, including their principal occupations during the last five years. Unless specific dates are provided, the individuals have held the listed positions for longer than five years.
INTERESTED DIRECTOR/OFFICER | |
| Name: | B. Reuben Auspitz* |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 59 |
| Current Position(s) Held with Fund: | Principal Executive Officer, President, Chairman & Director |
Term of Office1& Length of Time Served: | Indefinite - Director since 1984; Vice President 1984 - 2003; President since 2004; |
| | Principal Executive Officer since 2002 |
| Principal Occupation(s) During Past 5 Years: | Executive Vice President; Co-Executive Director; Executive Group Member**; Chief |
| | Compliance Officer since 2004 - Manning & Napier Advisors, Inc. President; Director - |
| | Manning & Napier Investor Services, Inc. Holds or has held one or more of |
| | the following titles for various subsidiaries and affiliates: President, Vice President, |
| | Director, Chairman, Treasurer, Chief Compliance Officer or Member. |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| | |
INDEPENDENT DIRECTORS | |
| Name: | Stephen B. Ashley |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 66 |
| Current Position(s) Held with Fund: | Director, Audit Committee Member, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1996 |
| Principal Occupation(s) During Past 5 Years: | Chairman, Director, President & Chief Executive Officer, |
| | The Ashley Group (property management and investment) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | Genesee Corp. |
| | The Ashley Group |
| | Fannie Mae |
| | |
| Name: | Peter L. Faber |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 68 |
| Current Position(s) Held with Fund: | Director, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1987 |
| Principal Occupation(s) During Past 5 Years: | Senior Counsel, McDermott, Will & Emery LLP (law firm) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | Partnership for New York City, Inc. |
| | New York Collegium |
| Name: | Harris H. Rusitzky |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 72 |
| Current Position(s) Held with Fund: | Director, Audit Committee Member, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1985 |
| Principal Occupation(s) During Past 5 Years: | President, The Greening Group (business consultants); Partner, The Restaurant Group |
| | (restaurants) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
26
Directors' and Officers' Information (unaudited)
OFFICERS | |
| Name: | Jeffrey S. Coons, Ph.D., CFA |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 43 |
| Current Position(s) Held with Fund: | Vice President |
Term of Office1& Length of Time Served: | Since 2004 |
| Principal Occupation(s) During Past 5 Years: | Co-Director of Research since 2002 & Executive Group Member**, |
| | Manning & Napier Advisors, Inc. Managing Director - Risk Management, Manning & |
| | Napier Advisors, Inc., 1993-2002. Holds one or more of the following titles for various |
| | subsidiaries and affiliates: President, Director, Treasurer or Senior Trust Officer. |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Christine Glavin |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 40 |
| Current Position(s) Held with Fund: | Principal Financial Officer, Chief Financial Officer |
Term of Office1& Length of Time Served: | Principal Financial Officer since 2002; Chief Financial Officer since 2001 |
| Principal Occupation(s) During Past 5 Years: | Fund Accounting Manager, Manning & Napier Advisors, Inc. |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Jodi L. Hedberg |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 39 |
| Current Position(s) Held with Fund: | Corporate Secretary, Chief Compliance Officer, Anti-Money Laundering Compliance |
| | Officer |
Term of Office1& Length of Time Served: | Corporate Secretary since 1997; Chief Compliance Officer since 2004 |
| Principal Occupation(s) During Past 5 Years: | Director of Compliance, Manning & Napier Advisors, Inc. and affiliates; Corporate |
| | Secretary, Manning & Napier Investor Services, Inc. since 2006 |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Alaina V. Metz |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 39 |
| Current Position(s) Held with Fund: | Special Assistant Secretary |
| Term of Office & Length of Time Served: | Indefinite - Since 2002 |
| Principal Occupation(s) During Past 5 Years: | Vice President, BISYS Fund Services Ohio, Inc. (mutual fund servicing company) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
*Interested Director, within the meaning of the Investment Company Act of 1940 by reason of his position with the Fund's investment advisor and distributor. Mr. Auspitz serves as the Executive Vice President and Director, Manning & Napier Advisors, Inc. and President and Director, Manning & Napier Investor Services, Inc., the Fund's distributor.
**The Executive Group performs the duties of the Office of the Chief Executive of Manning & Napier Advisors, Inc.
1The term of office for President, Vice President, Chief Financial Officer, and Corporate Secretary is one year and until their respective successors are chosen and qualified. All other officers' terms are indefinite.
27
[THIS PAGE INTENTIONALLY LEFT BLANK]
28
[THIS PAGE INTENTIONALLY LEFT BLANK]
29
Literature Requests (unaudited)
Proxy Voting Policies and Procedures
A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request:
By phone 1-800-466-3863
On the Securities and Exchange
Commission’s (SEC) web site http://www.sec.gov
Proxy Voting Record
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30th is available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
Quarterly Portfolio Holdings
The Series’ complete schedule of portfolio holdings for the 1st and 3rd quarters of each fiscal year are provided on Form N-Q, and are available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
The Series’ Form N-Q may be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
Prospectus and Statement of Additional Information (SAI)
The prospectus and SAI provide additional information about each Series, including charges, expenses and risks. These documents are available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
On the Advisor’s web site http://www.manningnapieradvisors.com
Additional information available at www.manningnapieradvisors.com
| 1. | Fund Holdings - Month-End |
| 2. | Fund Holdings - Quarter-End |
| 3. | Shareholder Report - Annual |
| 4. | Shareholder Report - Semi-Annual |
30
Manning & Napier Fund, Inc. Diversified Tax Exempt Series
Annual Report
December 31, 2006
Management Discussion and Analysis (unaudited)
Dear Shareholders:
Interest rates rise and interest rates fall; when they do, so too do the market prices of fixed income securities. The one difference is that when interest rates rise, prices fall and vice versa. Over the long-term, however, the total returns generated by most municipal bonds track their coupons, or more specifically, their yields to maturity. What was interesting about 2006 is that this long-term tendency presented itself over a much shorter time period. Municipal bond investors essentially earned their coupons in 2006; total returns tracked coupons pretty closely with short-term municipal yields modestly higher (about 30 basis points (i.e., 0.30%)) at the end of the year compared to where they started the year, and long-term municipal yields modestly lower. Given that, the Diversified Tax Exempt Series performed relatively well over the past 12 months.
While they are not explicitly tied to the U.S. Treasury markets, like all non-government sectors of the fixed income markets, municipal bonds take their cue from what happens there. In 2006, short-term U.S. Treasury yields moved sharply higher, almost a full percentage point, as the Federal Reserve (the “Fed”) pushed its Fed Funds target up from 4.25% to 5.25% during the first six months of the year. The Fed Funds target remained unchanged during the second half of 2006. Short- to intermediate-term yields moved slightly higher during the year, as did long-term U.S. Treasury yields. This differed from what happened in the municipal bond market.
During the first quarter of the year, the Fed raised the Fed Funds target because it was concerned about the inflationary effects of a run-up in commodity prices. Crude oil traded very close to $70 a barrel and the Commodity Research Bureau Raw Industrials Index rose more than 5% during the first three months of the year. The Fed was also concerned about the inflationary effects of the increases in “resource utilization,” primarily in the labor markets. The actions of the Fed and the economic environment pushed rates higher across the entire yield curve.
During the second quarter of the year, a modest acceleration in the rate of inflation showed up in the inflation measures themselves. At the end of May, the Consumer Price Index (CPI) was growing at a year over year rate of 4.1%, a bit faster than its 3.4% growth rate in December of 2005. Looking at the same measure in a slightly different fashion, the annualized growth rate through the first five months of 2006 was 5.1%. Through May, the CPI was only rising at an annualized rate of 3.6%.
Given the volatility associated with the food and energy components of the inflation indices, the “core” rate of inflation, the index excluding its food and energy components, has become increasingly important. During the second quarter, the core rate of inflation had also accelerated; it was up 2.4% year over year in May, slightly higher than its December reading of 2.2%. Unfortunately, the annualized readings were more troubling. Through the first five months of 2005, the core CPI measure annualized at a 2.4% rate; through the first five months of 2006, it was annualizing at 3.1%. Once again, interest rates moved higher across the entire yield curve.
Things began to change during the third quarter of the year with emerging signs that inflation pressures were receding. The Fed responded by leaving the Fed Funds target unchanged at both of its meetings during the quarter. The Fed was quite straightforward when it mentioned in its August press release that “inflation pressures seem likely to moderate over time, reflecting contained inflation expectations and the cumulative effects of monetary policy.” As for economic evidence of “the cumulative effects of monetary policy,” they were fairly widespread. Various indices related to economic growth rolled over during the quarter, and the Fed’s prior policy actions definitely played a role in the universally weak readings associated with the housing market. With the Fed on hold, short-term interest rates held steady, and intermediate- and longer-term interest rates moved sharply lower.
The Fed stayed on the same policy path during the fourth quarter, deciding at both of its meetings to leave the Fed Funds target unchanged. The reasoning remained the same, “inflation pressures seem likely to moderate over time.” However as the quarter progressed, there were subtle signs that the economic environment was holding just fine. The number of new jobs created each month grew throughout the quarter. The improving labor market, along with lower oil prices, translated into higher levels of consumer confidence. And as consumer spirits rose, same store sales picked back up after a miserable year over year reading in October. Short-term interest rates remained stable with the Fed on hold; after declining early in the quarter, longer-term interest rates retraced some of those gains as the year came to a close.
1
Management Discussion and Analysis (unaudited)
While the short-end of the municipal market tracked what was occurring in the U.S. Treasury market, longer-term municipals did not follow suit for a couple of reasons. First, tax receipts at the municipal level came in quite strong, causing municipal credit quality to improve, and the effect of that was most noticeable on the longer end of the municipal yield curve. Longer-term municipals also benefited from solid demand at the individual investor level.
As for the actual performance of the Diversified Tax Exempt Series in 2006, it came in at 3.94%. That was better than the Merrill Lynch 1-12 Year Municipal Bond Index, which returned 3.77% in 2006. The outperformance in the Series can be traced to its 2006 purchases of longer-term bonds, which benefited from the modest rate declines on that sector of the curve.
Over the longer-term interest rates and spreads will fluctuate; sometimes the cyclical and/or policy pressures will push them both higher, sometimes they will push both lower, and other times, like last year, all of the various factors will be a bit of a wash. The key to investment success requires the investor to focus on the secular (non-cyclical) trends and the fundamental forces that drive each, an approach that we apply to all of our investment decisions
We appreciate your business and wish you all the very best in the coming year.
Sincerely,
Manning & Napier Advisors, Inc.
2
Performance Update as of December 31, 2006 (unaudited)
| | Average Annual Total Returns |
| | As of December 31, 2006 |
| | One | Five | Ten | Since |
| | Year | Year | Year | Inception1 |
Manning & Napier Fund, Inc. - Diversified Tax Exempt Series2 | 3.94% | 4.81% | 4.87% | 4.80% |
| | | | | |
Merrill Lynch 1-12 Year Municipal Bond Index3 | 3.77% | 4.83% | 5.26% | 5.21% |
The following graph compares the value of a $10,000 investment in the Manning & Napier Fund, Inc. - Diversified Tax Exempt Series for the ten years ended December 31, 2006 to the Merrill Lynch 1-12 Year Municipal Bond Index.
Data for line graph to follow:
| | Manning & Napier Fund, Inc. | Merrill Lynch |
| Date | Diversified Tax Exempt Series2 | 1-12 Year Municipal Bond Index |
| 12/31/96 | $10,000 | $10,000 |
| 12/31/97 | 10,792 | 10,769 |
| 12/31/98 | 11,385 | 11,444 |
| 12/31/99 | 10,854 | 11,443 |
| 12/31/00 | 12,256 | 12,546 |
| 12/31/01 | 12,712 | 13,192 |
| 12/31/02 | 13,882 | 14,574 |
| 12/31/03 | 14,528 | 15,276 |
| 12/31/04 | 15,080 | 15,802 |
| 12/31/05 | 15,472 | 16,097 |
| 12/31/06 | 16,081 | 16,703 |
1Performance numbers for the Series and Index are calculated from February 14, 1994, the Series' inception date.
2The Series' performance does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. The Series' performance is historical and may not be indicative of future results.
3The Merrill Lynch 1-12 Year Municipal Bond Index is an unmanaged, market weighted index comprised of investment grade, fixed rate, coupon bearing municipal bonds with maturities greater than one year but less than twelve years. The Index returns assume reinvestment of coupons and, unlike Series returns, do not reflect any fees or expenses.
3
Shareholder Expense Example (unaudited)
As a shareholder of the Series, you may incur two types of costs: (1) transaction costs, including potential wire charges on redemptions and (2) ongoing costs, including management fees and other Series expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Series and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (July 1, 2006 to December 31, 2006).
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Series’ actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Series’ actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid during the period. You may use this information to compare the ongoing costs of investing in the Series and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transaction costs, such as potential wire charges on redemptions. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transaction costs were included, your costs would have been higher.
| | Beginning | Ending | Expenses Paid |
| | Account Value | Account Value | During Period* |
| | 7/1/06 | 12/31/06 | 7/1/06-12/31/06 |
| Actual | $1,000.00 | $1,046.20 | $3.35 |
| Hypothetical | | | |
| (5% return before expenses) | $1,000.00 | $1,021.93 | $3.31 |
*Expenses are equal to the Series’ annualized expense ratio (for the six-month period) of 0.65%, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). Expenses are based on the most recent fiscal half year; therefore, the expense ratio stated above may differ from the expense ratio stated in the financial highlights, which is based on one-year data.
4
Portfolio Composition as of December 31, 2006 (unaudited)
Data for pie chart to follow:
Bond Types1
| Certificate of Participation | 1.6% |
| General Obligation Bonds | 68.2% |
| Revenue Bonds | 24.8% |
| Special Tax | 0.3% |
| Tax Allocation | 1.0% |
| Cash, short-term investments, and other assets, less liabilities | 4.1% |
1As a percentage of net assets.
Credit Quality Ratings2,3
| Aaa | 83.7% |
| Aa | 11.4% |
| A | 0.8% |
| Unrated investments, such as cash, short-term investments, and other assets, less liabilities | 4.1% |
2As a percentage of net assets.
3Based on ratings from Moody’s, or the S&P equivalent. The Series may use different ratings provided by other rating agencies for purposes of determining compliance with the Series’ investment policies.
Top Ten States4
| Michigan | 4.9% |
| Ohio | 4.8% |
| New Jersey | 4.7% |
| Washington | 4.6% |
| Texas | 4.4% |
| New York | 4.1% |
| Illinois | 3.9% |
| Pennsylvania | 3.5% |
| California | 3.4% |
| Nevada | 3.4% |
4As a percentage of total investments.
5
Investment Portfolio - December 31, 2006
| | Credit | | |
| | Rating1 | Principal | Value |
| | (unaudited) | Amount | (Note 2) |
MUNICIPAL SECURITIES - 95.9% | | | |
| | | | |
Alabama - 2.2% | | | |
| Bessemer Governmental Utility Services Corp., Water Supply, Revenue Bond, MBIA, 5.20%, 6/1/2024 | Aaa | $500,000 | $518,755 |
| Birmingham, Capital Improvement, G.O. Bond, Series B, AMBAC, 5.00%, 12/1/2032 | Aaa | 1,005,000 | 1,046,205 |
| Fort Payne Waterworks Board, Revenue Bond, AMBAC, 3.50%, 7/1/2015 | Aaa | 665,000 | 643,747 |
| Hoover Board of Education, Capital Outlay Warrants, Special Tax Warrants, MBIA, 5.25%, 2/15/2017 | Aaa | 500,000 | 527,240 |
| Mobile County Board of School Commissioners, Capital Outlay Warrants, Prerefunded Balance, G.O. Bond, Series B, AMBAC, 5.00%, 3/1/2018 | Aaa | 500,000 | 525,680 |
| Odenville Utilities Board Water, Revenue Bond, MBIA, 4.30%, 8/1/2028 | Aaa | 500,000 | 501,215 |
| | | | 3,762,842 |
| | | | |
Alaska - 0.3% | | | |
| Alaska Municipal Banking Authority, Revenue Bond, MBIA, 4.10%, 6/1/2017 | Aaa | 455,000 | 458,731 |
| | | | |
| | | | |
Arizona - 2.5% | | | |
| Phoenix, G.O. Bond, Series B, 4.20%, 7/1/2021 | Aa1 | 1,500,000 | 1,498,050 |
| Salt River Project, Agricultural Impt. & Power District, Certificate of Participation, MBIA, 5.00%, 12/1/2011 | Aaa | 1,500,000 | 1,582,830 |
| Yuma County Library District, G.O. Bond, Series A, AMBAC, 4.50%, 7/1/2035 | Aaa | 1,200,000 | 1,200,000 |
| | | | 4,280,880 |
| | | | |
California - 3.4% | | | |
| California State, G.O. Bond, 5.25%, 2/1/2023 | A1 | 500,000 | 562,815 |
| California State, G.O. Bond, 4.75%, 12/1/2028 | A1 | 795,000 | 802,958 |
| Chula Vista Elementary School District, G.O. Bond, Series F, MBIA, 4.80%, 8/1/2024 | Aaa | 435,000 | 452,657 |
| Chula Vista Elementary School District, G.O. Bond, Series F, MBIA, 4.875%, 8/1/2025 | Aaa | 425,000 | 443,462 |
| Oak Valley Hospital District, G.O. Bond, FGIC, 4.50%, 7/1/2025 | Aaa | 1,395,000 | 1,403,816 |
| Richmond Joint Powers Financing Authority, Tax Allocation, Series A, MBIA, 5.25%, 9/1/2025 | Aaa | 1,570,000 | 1,676,258 |
| Wiseburn School District, Prerefunded Balance, G.O. Bond, Series A, FGIC, 5.25%, 8/1/2016 | Aaa | 330,000 | 339,831 |
| | | | 5,681,797 |
| | | | |
Colorado - 2.6% | | | |
| Broomfield Water Activity, Enterprise Water, Revenue Bond, MBIA, 5.00%, 12/1/2015 | Aaa | 700,000 | 745,339 |
The accompanying notes are an integral part of the financial statements.
6
Investment Portfolio - December 31, 2006
| | Credit | | |
| | Rating1 | Principal | Value |
| | (unaudited) | Amount | (Note 2) |
| | | | |
Colorado (continued) | | | |
| Colorado Water Resources & Power Development Authority, Water Resource, Revenue Bond, Series D, FSA, 4.375%, 8/1/2035 | Aaa | $1,420,000 | $1,391,557 |
| Commerce City, Certificate of Participation, AMBAC, 4.75%, 12/15/2032 | AAA2 | 1,000,000 | 1,030,410 |
| Denver City & County School District No. 1, Prerefunded Balance, G.O. Bond, FGIC, 5.00%, 12/1/2023 | Aaa | 895,000 | 937,754 |
| Denver City & County School District No. 1, Unrefunded Balance, G.O. Bond, FGIC, 5.00%, 12/1/2023 | Aaa | 105,000 | 109,036 |
| El Paso County School District No. 020, G.O. Bond, Series A, MBIA, 6.20%, 12/15/2007 | Aaa | 160,000 | 163,899 |
| | | | 4,377,995 |
| | | | |
Connecticut - 0.9% | | | |
| Stamford, G.O. Bond, 4.40%, 2/15/2026 | Aaa | 1,545,000 | 1,556,325 |
| | | | |
Delaware - 2.3% | | | |
| Delaware Transportation Authority, Revenue Bond, MBIA, 5.00%, 7/1/2011 | Aaa | 1,000,000 | 1,055,620 |
| New Castle County, G.O. Bond, Series A, 4.25%, 7/15/2025 | Aaa | 1,500,000 | 1,490,460 |
| New Castle County, G.O. Bond, Series A, 4.25%, 7/15/2026 | Aaa | 1,265,000 | 1,251,717 |
| | | | 3,797,797 |
| | | | |
Florida - 3.2% | | | |
| Florida State Board of Education, Capital Outlay, Prerefunded Balance, G.O. Bond, Series A, 5.00%, 6/1/2027 | Aaa | 750,000 | 761,768 |
| Florida State Board of Education, Capital Outlay, Public Education, G.O. Bond, Series A, FSA, 4.50%, 6/1/2025 | Aaa | 1,280,000 | 1,295,181 |
| Florida State Board of Education, Capital Outlay, Public Education, G.O. Bond, Series C, AMBAC, 5.00%, 6/1/2011 | Aaa | 425,000 | 447,746 |
| Florida State Department of Transportation, G.O. Bond, 5.00%, 7/1/2027 | Aa1 | 1,000,000 | 1,053,850 |
| Florida State, Jacksonville Transportation, Prerefunded Balance, G.O. Bond, Series A, 5.00%, 7/1/2027 | Aa1 | 710,000 | 721,978 |
| Miami-Dade County, Educational Facilities Authority, Revenue Bond, Series A, AMBAC, 5.00%, 4/1/2015 | Aaa | 510,000 | 548,964 |
| Tohopekaliga Water Authority, Utility System, Revenue Bond, Series A, FSA, 5.00%, 10/1/2028 | Aaa | 510,000 | 538,356 |
| | | | 5,367,843 |
| | | | |
Georgia - 3.1% | | | |
| Atlanta, Prerefunded Balance, G.O. Bond, 5.60%, 12/1/2018 | Aa3 | 350,000 | 357,532 |
| Atlanta, Water & Wastewater, Revenue Bond, Series A, MBIA, 5.00%, 11/1/2033 | Aaa | 310,000 | 324,449 |
The accompanying notes are an integral part of the financial statements.
7
Investment Portfolio - December 31, 2006
| | Credit | | |
| | Rating1 | Principal | Value |
| | (unaudited) | Amount | (Note 2) |
| | | | |
Georgia (continued) | | | |
| Atlanta, Water & Wastewater, Revenue Bond, FSA, 5.00%, 11/1/2043 | Aaa | $1,500,000 | $1,572,210 |
| Georgia State, G.O. Bond, Series B, 5.65%, 3/1/2012 | Aaa | 200,000 | 219,082 |
| Georgia State, G.O. Bond, Series B, 4.00%, 3/1/2022 | Aaa | 1,270,000 | 1,250,061 |
| Madison Water & Sewer, Revenue Bond, AMBAC, 4.625%, 7/1/2030 | Aaa | 1,000,000 | 1,007,690 |
| Rockdale County, Water & Sewer Authority, Prerefunded Balance, Revenue Bond, FSA, 5.00%, 7/1/2022 | Aaa | 450,000 | 462,010 |
| | | | 5,193,034 |
| | | | |
Hawaii - 0.2% | | | |
| Hawaii State, G.O. Bond, Series CH, 6.00%, 11/1/2007 | Aa2 | 260,000 | 265,052 |
| | | | |
Illinois - 3.9% | | | |
| Chicago, G.O. Bond, Series A, FSA, 4.75%, 1/1/2038 | Aaa | 1,500,000 | 1,536,450 |
| Chicago, G.O. Bond, Series A, MBIA, 5.00%, 1/1/2034 | Aaa | 830,000 | 864,478 |
| Chicago, Prerefunded Balance, G.O. Bond, FGIC, 5.25%, 1/1/2027 | Aaa | 250,000 | 258,988 |
| Chicago Neighborhoods Alive 21 Program, Prerefunded Balance, G.O. Bond, FGIC, 5.375%, 1/1/2026 | Aaa | 500,000 | 530,915 |
| Cook County, G.O. Bond, Series A, FGIC, 5.00%, 11/15/2022 | Aaa | 750,000 | 770,917 |
| Illinois State, Certificate of Participation, Series 1995 A, MBIA, 5.60%, 7/1/2010 | Aaa | 100,000 | 101,646 |
| Illinois State, G.O. Bond, 5.00%, 12/1/2027 | Aa3 | 600,000 | 626,514 |
| Madison & St. Clair Counties School District No. 010 Collinsville, School Building, Prerefunded Balance, G.O. Bond, FGIC, 5.125%, 2/1/2019 | Aaa | 500,000 | 527,565 |
| Rock Island County School District No. 041 Rock Island, G.O. Bond, FSA, 5.125%, 12/1/2015 | Aaa | 200,000 | 205,048 |
| Springfield Electric, Revenue Bond, MBIA, 5.00%, 3/1/2035 | Aaa | 1,000,000 | 1,058,760 |
| | | | 6,481,281 |
| | | | |
Indiana - 1.8% | | | |
| Frankfort High School Elementary School Building Corp., Revenue Bond, FSA, 4.75%, 7/15/2025 | AAA2 | 1,500,000 | 1,555,920 |
| La Porte County, G.O. Bond, FGIC, 5.20%, 1/15/2018 | Aaa | 300,000 | 320,313 |
| Monroe County Community School Corp., Prerefunded Balance, Revenue Bond, MBIA, 5.25%, 7/1/2016 | Aaa | 125,000 | 127,510 |
| Noblesville Sewage Works, Revenue Bond, AMBAC, 5.00%, 1/1/2024 | Aaa | 550,000 | 579,942 |
| North Lawrence Indiana Community Schools Building Corp., Revenue Bond, FSA, 5.00%, 7/15/2020 | Aaa | 450,000 | 475,681 |
| | | | 3,059,366 |
The accompanying notes are an integral part of the financial statements.
8
Investment Portfolio - December 31, 2006
| | Credit | | |
| | Rating1 | Principal | Value |
| | (unaudited) | Amount | (Note 2) |
| | | | |
Iowa - 2.5% | | | |
| Indianola Community School District, G.O. Bond, FGIC, 5.20%, 6/1/2021 | Aaa | $425,000 | $457,257 |
| Iowa City Community School District, G.O. Bond, FSA, 4.00%, 6/1/2018 | Aaa | 425,000 | 422,909 |
| Iowa City, Sewer, Revenue Bond, MBIA, 5.75%, 7/1/2021 | Aaa | 250,000 | 250,403 |
| Polk County, G.O. Bond, Series C, 4.00%, 6/1/2017 | Aa1 | 995,000 | 995,736 |
| Polk County, G.O. Bond, Series C, 4.125%, 6/1/2025 | Aa1 | 2,075,000 | 2,000,881 |
| | | | 4,127,186 |
| | | | |
Kansas - 2.7% | | | |
| Johnson County Unified School District No. 229, Prerefunded Balance, G.O. Bond, Series A, 5.00%, 10/1/2014 | Aa1 | 220,000 | 222,279 |
| Johnson County Unified School District No. 231, Prerefunded Balance, G.O. Bond, Series A, FGIC, 5.75%, 10/1/2016 | Aaa | 500,000 | 528,335 |
| Johnson & Miami Counties Unified School District No. 230, G.O. Bond, FGIC, 4.00%, 9/1/2022 | Aaa | 1,000,000 | 974,910 |
| Sedgwick County Unified School District No. 265, G.O. Bond, FSA, 5.00%, 10/1/2025 | Aaa | 1,090,000 | 1,165,624 |
| Shawnee County Unified School District No. 450, Shawnee Heights, G.O. Bond, FSA, 4.20%, 9/1/2020 | Aaa | 700,000 | 700,266 |
| Shawnee County Unified School District No. 450, Shawnee Heights, G.O. Bond, FSA, 4.25%, 9/1/2021 | Aaa | 580,000 | 579,971 |
| Wyandotte County School District No. 204 Bonner Springs, Prerefunded Balance, G.O. Bond, Series A, FSA, 5.375%, 9/1/2015 | Aaa | 290,000 | 306,930 |
| Wyandotte County School District No. 204 Bonner Springs, Unrefunded Balance, G.O. Bond, Series A, FSA, 5.375%, 9/1/2015 | Aaa | 110,000 | 116,112 |
| | | | 4,594,427 |
| | | | |
Kentucky - 1.1% | | | |
| Kentucky State Turnpike Authority, Economic Development, Revenue Bond, AMBAC, 6.50%, 7/1/2008 | Aaa | 250,000 | 260,420 |
| Lexington-Fayette Urban County Government, Public Facilities Corp., Revenue Bond, MBIA, 4.00%, 10/1/2018 | Aaa | 1,655,000 | 1,649,224 |
| | | | 1,909,644 |
| | | | |
Louisiana - 1.9% | | | |
| Caddo Parish Parishwide School District, G.O. Bond, MBIA, 4.35%, 3/1/2026 | Aaa | 660,000 | 654,034 |
| Caddo Parish Parishwide School District, G.O. Bond, MBIA, 4.375%, 3/1/2027 | Aaa | 1,090,000 | 1,080,561 |
| Lafayette Public Power Authority, Revenue Bond, Series A, AMBAC, 5.00%, 11/1/2012 | Aaa | 730,000 | 773,603 |
| New Orleans Sewage Service, Revenue Bond, FGIC, 5.25%, 6/1/2012 | Aaa | 300,000 | 304,641 |
The accompanying notes are an integral part of the financial statements.
9
Investment Portfolio - December 31, 2006
| | Credit | | |
| | Rating1 | Principal | Value |
| | (unaudited) | Amount | (Note 2) |
| | | | |
Louisiana (continued) | | | |
| Orleans Parish Parishwide School District, G.O. Bond, Series A, FGIC, 5.125%, 9/1/2016 | Aaa | $400,000 | $405,020 |
| | | | 3,217,859 |
| | | | |
Maine - 0.5% | | | |
| Kennebec Water District, Revenue Bond, FSA, 5.125%, 12/1/2021 | Aaa | 750,000 | 768,367 |
| | | | |
Maryland - 2.0% | | | |
| Anne Arundel County, Water & Sewer, G.O. Bond, 4.125%, 3/1/2024 | Aa1 | 345,000 | 338,938 |
| Anne Arundel County, Water & Sewer, G.O. Bond, 4.20%, 3/1/2025 | Aa1 | 1,770,000 | 1,751,273 |
| Baltimore County, Metropolitan District, G.O. Bond, 4.25%, 9/1/2029 | Aaa | 1,000,000 | 989,890 |
| Baltimore, Water Project, Revenue Bond, Series A, FGIC, 5.55%, 7/1/2009 | Aaa | 260,000 | 272,360 |
| | | | 3,352,461 |
| | | | |
Massachusetts - 2.4% | | | |
| Boston, G.O. Bond, Series A, MBIA, 4.125%, 1/1/2021 | Aaa | 1,000,000 | 994,210 |
| Boston, G.O. Bond, Series A, MBIA, 4.125%, 1/1/2022 | Aaa | 410,000 | 404,805 |
| Lowell, State Qualified, G.O. Bond, AMBAC, 5.00%, 2/1/2020 | Aaa | 500,000 | 530,205 |
| Massachusetts State, G.O. Bond, Series C, AMBAC, 5.75%, 8/1/2010 | Aaa | 400,000 | 427,864 |
| Massachusetts State, G.O. Bond, Series D, 5.25%, 10/1/2014 | Aa2 | 1,000,000 | 1,097,610 |
| Plymouth, G.O. Bond, MBIA, 5.25%, 10/15/2020 | Aaa | 100,000 | 106,122 |
| Richmond, G.O. Bond, MBIA, 5.00%, 4/15/2021 | Aaa | 400,000 | 423,216 |
| | | | 3,984,032 |
| | | | |
Michigan - 4.8% | | | |
| Bendle Public School District, School Building & Site, G.O. Bond, FGIC, 4.50%, 5/1/2028 | Aaa | 640,000 | 642,874 |
| Detroit City School District, School Building & Site Impt., G.O. Bond, Series B, FGIC, 5.00%, 5/1/2033 | Aaa | 750,000 | 782,197 |
| Detroit Sewer Disposal System, Revenue Bond, Series B, FGIC, 4.625%, 7/1/2034 | Aaa | 1,500,000 | 1,507,455 |
| Holly Area School District, G.O. Bond, FGIC, 5.00%, 5/1/2022 | Aaa | 500,000 | 511,930 |
| Hudsonville Public Schools, Prerefunded Balance, G.O. Bond, FGIC, 5.15%, 5/1/2027 | Aaa | 185,000 | 188,828 |
| Hudsonville Public Schools, Unrefunded Balance, G.O. Bond, FGIC, 5.15%, 5/1/2027 | Aaa | 40,000 | 40,645 |
| Lincoln Park School District, Prerefunded Balance, G.O. Bond, FGIC, 5.00%, 5/1/2026 | Aaa | 125,000 | 127,344 |
The accompanying notes are an integral part of the financial statements.
10
Investment Portfolio - December 31, 2006
| | Credit | | |
| | Rating1 | Principal | Value |
| | (unaudited) | Amount | (Note 2) |
| | | | |
Michigan (continued) | | | |
| Lincoln Park School District, Unrefunded Balance, G.O. Bond, FGIC, 5.00%, 5/1/2026 | Aaa | $355,000 | $359,565 |
| Muskegon Water, Revenue Bond, FSA, 4.75%, 5/1/2019 | Aaa | 565,000 | 577,261 |
| Oakland County, George W. Kuhn Drain District, G.O. Bond, Series B, 5.375%, 4/1/2021 | Aaa | 475,000 | 491,202 |
| Saginaw City School District, School Building & Site, G.O. Bond, FSA, 4.50%, 5/1/2031 | Aaa | 1,695,000 | 1,697,475 |
| St. Joseph County, Sewer Disposal Systems - Constantine, G.O. Bond, FSA, 5.00%, 4/1/2012 | Aaa | 100,000 | 100,816 |
| Warren Woods Public Schools, School Building & Site, G.O. Bond, FSA, 4.50%, 5/1/2026 | Aaa | 1,015,000 | 1,022,653 |
| | | | 8,050,245 |
| | | | |
Minnesota - 2.3% | | | |
| Big Lake Independent School District No. 727, G.O. Bond, MBIA, 5.50%, 2/1/2014 | Aaa | 500,000 | 500,760 |
| Brooklyn Center Independent School District No. 286, School Building, G.O. Bond, Series A, MBIA, 4.375%, 2/1/2026 | Aaa | 1,105,000 | 1,106,193 |
| Hennepin County, G.O. Bond, Series A, 4.50%, 12/1/2025 | Aaa | 1,500,000 | 1,526,970 |
| Pine County, G.O. Bond, Series A, FGIC, 4.40%, 2/1/2028 | Aaa | 555,000 | 553,468 |
| Western Minnesota Municipal Power Agency, Revenue Bond, 6.625%, 1/1/2016 | Aaa | 175,000 | 203,640 |
| | | | 3,891,031 |
| | | | |
Mississippi - 0.9% | | | |
| Biloxi Public School District, Revenue Bond, MBIA, 5.00%, 4/1/2017 | Aaa | 500,000 | 520,050 |
| De Soto County School District, G.O. Bond, FSA, 5.00%, 2/1/2013 | Aaa | 1,000,000 | 1,058,810 |
| | | | 1,578,860 |
| | | | |
Missouri - 0.4% | | | |
| Metropolitan St. Louis Sewer District Wastewater System, Revenue Bond, Series A, MBIA, 3.60%, 5/1/2013 | Aaa | 600,000 | 596,148 |
| | | | |
| | | | |
Nevada - 3.4% | | | |
| Clark County Transportation, G.O. Bond, Series A, FGIC, 4.50%, 12/1/2019 | Aaa | 500,000 | 505,590 |
| Clark County Public Facilities, G.O. Bond, Series C, FGIC, 5.00%, 6/1/2024 | Aaa | 425,000 | 435,493 |
| Las Vegas Valley Water District, Water Impt., G.O. Bond, Series A, FSA, 4.75%, 6/1/2033 | Aaa | 1,500,000 | 1,544,760 |
| Nevada State, Project Nos. 66 & 67, Prerefunded Balance, G.O. Bond, Series A, FGIC, 5.00%, 5/15/2028 | Aaa | 625,000 | 637,056 |
The accompanying notes are an integral part of the financial statements.
11
Investment Portfolio - December 31, 2006
| | Credit | | |
| | Rating1 | Principal | Value |
| | (unaudited) | Amount | (Note 2) |
| | | | |
Nevada (continued) | | | |
| Nevada State, Project Nos. 66 & 67, Unrefunded Balance, G.O. Bond, Series A, FGIC, 5.00%, 5/15/2028 | Aaa | $125,000 | $126,654 |
| North Las Vegas, G.O. Bond, MBIA, 5.00%, 5/1/2024 | Aaa | 1,500,000 | 1,603,785 |
| Truckee Meadows, Water Authority, Revenue Bond, Series A, FSA, 5.00%, 7/1/2025 | Aaa | 750,000 | 782,527 |
| | | | 5,635,865 |
| | | | |
New Jersey - 4.7% | | | |
| East Brunswick Township Board of Education, G.O. Bond, FSA, 4.50%, 11/1/2028 | Aaa | 835,000 | 841,622 |
| East Brunswick Township Board of Education, G.O. Bond, FSA, 4.50%, 11/1/2029 | Aaa | 1,000,000 | 1,005,750 |
| Essex County, G.O. Bond, Series A, MBIA, 4.50%, 5/1/2031 | Aaa | 500,000 | 503,780 |
| Hudson County, G.O. Bond, CIFG, 4.25%, 9/1/2021 | Aaa | 930,000 | 933,618 |
| Jersey City Water, Prerefunded Balance, G.O. Bond, FSA, 5.50%, 3/15/2011 | Aaa | 225,000 | 230,346 |
| Morris County Impt. Authority, School District, Morris Hills Regional District, Revenue Bond, 3.70%, 10/1/2018 | Aaa | 540,000 | 525,393 |
| New Jersey Transportation Trust Fund Authority, Transportation System, Unrefunded Balance, Revenue Bond, Series C, FSA, 5.50%, 12/15/2013 | Aaa | 1,400,000 | 1,548,946 |
| South Brunswick Township Board of Education, G.O. Bond, MBIA, 4.125%, 8/1/2012 | Aaa | 1,200,000 | 1,229,160 |
| Sparta Township School District, G.O. Bond, FSA, 4.30%, 2/15/2030 | Aaa | 1,000,000 | 984,960 |
| | | | 7,803,575 |
| | | | |
New Mexico - 0.5% | | | |
| New Mexico Finance Authority, Public Project Revolving Fund, Revenue Bond, Series A, MBIA, 3.25%, 6/1/2013 | Aaa | 800,000 | 769,896 |
| | | | |
| | | | |
New York - 4.1% | | | |
| Erie County, Public Impt., G.O. Bond, Series A, FGIC, 5.00%, 9/1/2014 | Aaa | 380,000 | 405,107 |
| Hampton Bays Union Free School District, G.O.Bond, FSA, 4.375%, 9/15/2029 | Aaa | 2,225,000 | 2,230,985 |
| Mount Morris Central School District, G.O. Bond, FGIC, 4.125%, 6/15/2014 | Aaa | 1,290,000 | 1,331,048 |
| New York City Municipal Water Finance Authority, Revenue Bond, Series E, FGIC, 5.00%, 6/15/2026 | Aaa | 750,000 | 781,597 |
| New York State Urban Development Corp., Revenue Bond, Series B, MBIA, 5.00%, 1/1/2019 | AAA2 | 1,000,000 | 1,080,490 |
| Orange County, G.O. Bond, 5.125%, 9/1/2024 | Aa1 | 500,000 | 509,955 |
| Spencerport Central School District, G.O. Bond, FSA, 5.00%, 11/15/2012 | Aaa | 350,000 | 359,384 |
The accompanying notes are an integral part of the financial statements.
12
Investment Portfolio - December 31, 2006
| | Credit | | |
| | Rating1 | Principal | Value |
| | (unaudited) | Amount | (Note 2) |
| | | | |
New York (continued) | | | |
| Westchester County, Unrefunded Balance, G.O. Bond, 4.75%, 11/15/2016 | Aaa | $120,000 | $121,292 |
| | | | 6,819,858 |
North Carolina - 1.9% | | | |
| Cary, G.O. Bond, 5.00%, 3/1/2018 | Aaa | 700,000 | 744,618 |
| Mecklenburg County, Public Impt., G.O. Bond, Series A, 4.125%, 2/1/2022 | Aaa | 1,455,000 | 1,446,066 |
| Raleigh, G.O. Bond, 4.40%, 6/1/2017 | Aaa | 250,000 | 256,607 |
| Union County, Prerefunded Balance, G.O. Bond, Series B, FGIC, 5.30%, 3/1/2013 | Aaa | 250,000 | 263,635 |
| Wilson, G.O. Bond, AMBAC, 5.10%, 6/1/2019 | Aaa | 400,000 | 423,772 |
| | | | 3,134,698 |
| | | | |
North Dakota - 1.1% | | | |
| Fargo, G.O. Bond, Series A, MBIA, 4.70%, 5/1/2030 | Aaa | 1,840,000 | 1,872,936 |
| | | | |
Ohio - 4.7% | | | |
| Brookville Local School District, School Impt., G.O. Bond, FSA, 4.125%, 12/1/2026 | Aaa | 660,000 | 633,521 |
| Cleveland, Various Purposes, G.O. Bond, MBIA, 5.00%, 12/1/2012 | Aaa | 1,140,000 | 1,218,763 |
| Columbus, Limited Tax, G.O. Bond, Series 2, 5.00%, 7/1/2017 | Aaa | 1,000,000 | 1,077,720 |
| Columbus City School District, Facilities Construction & Impt., G.O. Bond, FSA, 4.375%, 12/1/2032 | Aaa | 1,000,000 | 986,980 |
| Licking Heights Local School District, School Facilities Construction & Impt., G.O. Bond, Series A, MBIA, 5.00%, 12/1/2022 | Aaa | 1,450,000 | 1,551,703 |
| Newark City School District, School Impt., G.O. Bond, FGIC, 4.25%, 12/1/2027 | Aaa | 500,000 | 490,465 |
| Oak Hills Local School District, Prerefunded Balance, G.O. Bond, MBIA, 5.125%, 12/1/2025 | Aaa | 490,000 | 501,520 |
| Ohio State Conservation Project, G.O. Bond, Series A, 5.00%, 3/1/2015 | Aa1 | 1,000,000 | 1,076,420 |
| Springfield City School District, Prerefunded Balance, G.O. Bond, FGIC, 5.20%, 12/1/2023 | Aaa | 325,000 | 349,576 |
| | | | 7,886,668 |
| | | | |
Oklahoma - 1.6% | | | |
| Oklahoma City, G.O. Bond, MBIA, 4.25%, 3/1/2023 | Aaa | 2,000,000 | 1,988,320 |
| Oklahoma State Turnpike Authority, Prerefunded Balance, Revenue Bond, Series A, FGIC, 5.00%, 1/1/2023 | Aaa | 750,000 | 770,580 |
| | | | 2,758,900 |
The accompanying notes are an integral part of the financial statements.
13
Investment Portfolio - December 31, 2006
| | Credit | | |
| | Rating1 | Principal | Value |
| | (unaudited) | Amount | (Note 2) |
| | | | |
Oregon - 1.8% | | | |
| Josephine County Unit School District Three Rivers, Prerefunded Balance, G.O. Bond, FSA, 5.25%, 6/15/2017 | Aaa | $825,000 | $878,881 |
| Oregon State Board of Higher Education, G.O. Bond, Series B, 5.00%, 8/1/2033 | Aa3 | 1,500,000 | 1,531,305 |
| Washington County School District No. 015 Forest Grove, Prerefunded Balance, G.O. Bond, FSA, 5.50%, 6/15/2017 | Aaa | 500,000 | 537,755 |
| | | | 2,947,941 |
| | | | |
Pennsylvania - 3.5% | | | |
| Beaver County, G.O. Bond, MBIA, 5.15%, 10/1/2017 | Aaa | 300,000 | 303,063 |
| Jenkintown School District, G.O. Bond, Series A, FGIC, 4.50%, 5/15/2032 | Aaa | 1,000,000 | 1,000,900 |
| Pennsylvania State, G.O. Bond, MBIA, 5.00%, 1/1/2011 | Aaa | 1,500,000 | 1,575,960 |
| Pennsylvania State Turnpike Commission, Prerefunded Balance, Revenue Bond, AMBAC, 5.375%, 7/15/2019 | Aaa | 530,000 | 572,453 |
| Philadelphia, Water & Wastewater, Revenue Bond, MBIA, 5.60%, 8/1/2018 | Aaa | 20,000 | 21,931 |
| Plum Boro School District, G.O. Bond, Series A, FGIC, 4.50%, 9/15/2030 | AAA2 | 855,000 | 856,915 |
| Uniontown Area School District, G.O. Bond, FSA, 4.35%, 10/1/2034 | AAA2 | 1,500,000 | 1,467,705 |
| | | | 5,798,927 |
| | | | |
Rhode Island - 0.6% | | | |
| Rhode Island Clean Water Finance Agency, Revenue Bond, Series A, MBIA, 5.00%, 10/1/2035 | Aaa | 1,000,000 | 1,040,000 |
| | | | |
| | | | |
South Carolina - 3.1% | | | |
| Beaufort County School District, Prerefunded Balance, G.O. Bond, Series A, 5.00%, 3/1/2020 | Aa1 | 500,000 | 525,680 |
| Charleston County, Transportation Sales Tax, G.O. Bond, 5.00%, 11/1/2017 | Aa1 | 1,000,000 | 1,087,210 |
| Orangeburg County Consolidated School District 5, G.O. Bond, 5.625%, 3/1/2019 | Aa1 | 800,000 | 843,688 |
| South Carolina, Transportation Infrastructure Bank, Prerefunded Balance, Revenue Bond, Series A, AMBAC, 5.25%, 10/1/2021 | Aaa | 1,500,000 | 1,578,690 |
| South Carolina, State Institutional - South Carolina State University, G.O. Bond, Series D, 4.25%, 10/1/2026 | Aaa | 1,250,000 | 1,233,475 |
| | | | 5,268,743 |
| | | | |
South Dakota - 0.4% | | | |
| Rapid City Area School District No. 51-4, Capital Outlay Certificates, G.O. Bond, FSA, 4.75%, 1/1/2018 | Aaa | 650,000 | 657,638 |
The accompanying notes are an integral part of the financial statements.
14
Investment Portfolio - December 31, 2006
| | Credit | | |
| | Rating1 | Principal | Value |
| | (unaudited) | Amount | (Note 2) |
| | | | |
Tennessee - 2.1% | | | |
| Cleveland Water & Sewer, Prerefunded Balance, G.O. Bond, FGIC, 5.35%, 9/1/2023 | Aaa | $450,000 | $455,189 |
| Rhea County, Prerefunded Balance, G.O. Bond, MBIA, 5.00%, 4/1/2018 | Aaa | 950,000 | 999,695 |
| Shelby County, G.O. Bond, Series A, 5.50%, 3/1/2010 | Aa2 | 2,000,000 | 2,112,040 |
| | | | 3,566,924 |
| | | | |
Texas - 4.4% | | | |
| Alamo Community College District, G.O. Bond, Series A, MBIA, 5.00%, 8/15/2024 | Aaa | 1,020,000 | 1,088,187 |
| Alvin Independent School District, G.O. Bond, 4.375%, 2/15/2024 | Aaa | 750,000 | 743,273 |
| Brazoria County, G.O. Bond, FGIC, 4.75%, 9/1/2011 | Aaa | 445,000 | 451,982 |
| Brazos River Authority, Revenue Bond, Series B, FGIC, 4.25%, 12/1/2017 | Aaa | 1,125,000 | 1,134,383 |
| Huntsville Independent School District, G.O. Bond, 4.50%, 2/15/2029 | Aaa | 1,220,000 | 1,216,547 |
| McKinney Waterworks & Sewer, Revenue Bond, FGIC, 4.75%, 3/15/2024 | Aaa | 1,000,000 | 1,027,110 |
| North Texas Municipal Water District, Regional Wastewater, Revenue Bond, FSA, 5.00%, 6/1/2012 | Aaa | 150,000 | 150,777 |
| Richardson Independent School District, Prerefunded Balance, G.O. Bond, Series B, 5.00%, 2/15/2021 | Aaa | 500,000 | 504,315 |
| San Patricio Municipal Water District, Prerefunded Balance, Revenue Bond, FSA, 5.20%, 7/10/2028 | Aaa | 490,000 | 509,022 |
| Waller Consolidated Independent School District, G.O. Bond, 4.75%, 2/15/2023 | Aaa | 500,000 | 509,540 |
| | | | 7,335,136 |
Utah - 1.4% | | | |
| Mountain Regional Water Special Service District, Revenue Bond, MBIA, 5.00%, 12/15/2030 | Aaa | 1,240,000 | 1,310,816 |
| St. George, Parks and Recreation, G.O. Bond, AMBAC, 4.00%, 8/1/2019 | Aaa | 795,000 | 783,679 |
| Utah State Building Ownership Authority, Revenue Bond, Series C, FSA, 5.50%, 5/15/2011 | Aaa | 300,000 | 321,165 |
| | | | 2,415,660 |
| | | | |
Virginia - 0.7% | | | |
| Norfolk, Capital Impt., G.O. Bond, MBIA, 4.375%, 3/1/2024 | Aaa | 685,000 | 689,411 |
| Richmond, G.O. Bond, Series B, FSA, 4.75%, 7/15/2023 | Aaa | 400,000 | 415,016 |
| Spotsylvania County Water & Sewer Systems, Prerefunded Balance, Revenue Bond, MBIA, 5.25%, 6/1/2016 | Aaa | 130,000 | 133,461 |
| | | | 1,237,888 |
The accompanying notes are an integral part of the financial statements.
15
Investment Portfolio - December 31, 2006
| | Credit | Principal | |
| | Rating1 | Amount/ | Value |
| | (unaudited) | Shares | (Note 2) |
| | | | |
Washington - 4.5% | | | |
| Franklin County, G.O. Bond, FGIC, 5.125%, 12/1/2022 | Aaa | $1,000,000 | $1,062,560 |
| King County, G.O. Bond, Series B, MBIA, 5.00%, 1/1/2030 | Aaa | 400,000 | 407,508 |
| King County School District No. 411 Issaquah, G.O. Bond, Series A, FSA, 5.25%, 12/1/2018 | Aaa | 2,420,000 | 2,645,907 |
| King County, Sewer, Revenue Bond, Series A, MBIA, 4.50%, 1/1/2032 | Aaa | 1,070,000 | 1,068,406 |
| Seattle, Drain & Wastewater, Revenue Bond, MBIA, 4.375%, 2/1/2026 | Aaa | 2,000,000 | 1,983,320 |
| Washington State, G.O. Bond, Series A, 5.00%, 1/1/2023 | Aa1 | 410,000 | 414,080 |
| | | | 7,581,781 |
West Virginia - 0.5% | | | |
| West Virginia State Water Development Authority, Revenue Bond, Series A, FGIC, 4.25%, 11/1/2026 | Aaa | 820,000 | 802,731 |
| | | | |
Wisconsin - 3.0% | | | |
| Central Brown County Water Authority, Water Systems, Revenue Bond, AMBAC, 5.00%, 12/1/2035 | Aaa | 1,500,000 | 1,579,350 |
| Kenosha, G.O. Bond, Series B, FSA, 5.00%, 9/1/2011 | Aaa | 765,000 | 807,947 |
| Oshkosh, Corporate Purposes, G.O. Bond, Series A, FGIC, 5.05%, 12/1/2021 | Aaa | 450,000 | 473,949 |
| Stoughton Area School District, G.O. Bond, FGIC, 4.875%, 4/1/2016 | Aaa | 500,000 | 520,710 |
| Two Rivers Public School District, Prerefunded Balance, G.O. Bond, FSA, 5.625%, 3/1/2019 | Aaa | 415,000 | 439,228 |
| Washington County, Workforce Development Center, G.O. Bond, 3.75%, 3/1/2007 | Aa1 | 25,000 | 25,003 |
| West De Pere School District, Prerefunded Balance, G.O. Bond, Series A, FSA, 5.25%, 10/1/2017 | Aaa | 500,000 | 527,630 |
| Wisconsin State Transportation, Revenue Bond, Series A, FSA, 5.00%, 7/1/2025 | Aaa | 700,000 | 745,374 |
| | | | 5,119,191 |
| | | | |
TOTAL MUNICIPAL SECURITIES | | | |
| (Identified Cost $157,965,731) | | | 160,808,159 |
| | | | |
SHORT-TERM INVESTMENTS - 2.4% | | | |
| Dreyfus Municipal Reserves - Class R | | | |
| (Identified Cost $4,080,353) | | 4,080,353 | 4,080,353 |
| | | | |
TOTAL INVESTMENTS - 98.3% | | | |
| (Identified Cost $162,046,084) | | | 164,888,512 |
| | | | |
OTHER ASSETS, LESS LIABILITIES - 1.7% | | | 2,800,100 |
| | | | |
NET ASSETS - 100% | | | $167,688,612 |
The accompanying notes are an integral part of the financial statements.
16
Investment Portfolio - December 31, 2006
KEY:
G.O. Bond - General Obligation Bond
Impt. - Improvement
No. - Number
Scheduled principal and interest payments are guaranteed by:
AMBAC (AMBAC Assurance Corp.)
CIFG (CIFG North America, Inc.)
FGIC (Financial Guaranty Insurance Co.)
FSA (Financial Security Assurance)
MBIA (MBIA, Inc.)
The insurance does not guarantee the market value of the municipal bonds.
1Credit ratings from Moody’s (unaudited).
2Credit ratings from S&P (unaudited).
The Series' portfolio holds, as a percentage of net assets, greater than 10% in bonds insured by the following companies: MBIA - 24.9%; FSA - 23.1%; FGIC - 16.0%.
The accompanying notes are an integral part of the financial statements.
17
Statement of Assets and Liabilites
December 31, 2006
ASSETS: | |
| | |
| Investments, at value (identified cost $162,046,084) (Note 2) | $164,888,512 |
| Interest receivable | 2,093,101 |
| Receivable for fund shares sold | 811,284 |
| Dividends receivable | 14,672 |
| | |
| TOTAL ASSETS | 167,807,569 |
| | |
LIABILITIES: | |
| | |
| Accrued management fees (Note 3) | 69,177 |
| Accrued fund accounting and transfer agent fees (Note 3) | 12,144 |
| Accrued Chief Compliance Officer service fees (Note 3) | 429 |
| Accrued directors' fees (Note 3) | 191 |
| Audit fees payable | 24,701 |
| Payable for fund shares repurchased | 7,807 |
| Other payables and accrued expenses | 4,508 |
| | |
| TOTAL LIABILITIES | 118,957 |
| | |
TOTAL NET ASSETS | $167,688,612 |
| | |
NET ASSETS CONSIST OF: | |
| | |
| Capital stock | $153,183 |
| Additional paid-in-capital | 163,633,379 |
| Undistributed net investment income | 1,059,622 |
| Net unrealized appreciation on investments | 2,842,428 |
| | |
TOTAL NET ASSETS | $167,688,612 |
| | |
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE ($167,688,612/15,318,266 shares) | $10.95 |
The accompanying notes are an integral part of the financial statements.
18
For the Year Ended December 31, 2006
INVESTMENT INCOME: | |
| | |
| Interest | $5,814,982 |
| Dividends | 142,400 |
| | |
| Total Investment Income | 5,957,382 |
| | |
EXPENSES: | |
| | |
| Management fees (Note 3) | 680,167 |
| Fund accounting and transfer agent fees (Note 3) | 140,870 |
| Directors' fees (Note 3) | 7,100 |
| Chief Compliance Officer service fees (Note 3) | 6,195 |
| Custodian fees | 9,400 |
| Miscellaneous | 58,774 |
| | |
| Total Expenses | 902,506 |
| | |
| NET INVESTMENT INCOME | 5,054,876 |
| | |
REALIZED AND UNREALIZED GAIN ON INVESTMENTS: | |
| | |
| Net realized gain on investments | 162,857 |
| Net change in unrealized appreciation on investments | 319,437 |
| | |
| NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS | 482,294 |
| | |
| NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS | $5,537,170 |
The accompanying notes are an integral part of the financial statements.
19
Statements of Changes in Net Assets
| | For the | For the |
| | Year Ended | Year Ended |
| | 12/31/06 | 12/31/05 |
| | | |
INCREASE (DECREASE) IN NET ASSETS: | | |
| | | |
OPERATIONS: | | |
| | | |
| Net investment income | $5,054,876 | $3,656,495 |
| Net realized gain on investments | 162,857 | 104,286 |
| Net change in unrealized appreciation on investments | 319,437 | (1,163,694) |
| | | |
| Net increase from operations | 5,537,170 | 2,597,087 |
| | | |
DISTRIBUTIONS TO SHAREHOLDERS (Note 7): | | |
| | | |
| From net investment income | (4,612,559) | (3,408,479) |
| From net realized gain on investments | (134,415) | (108,954) |
| | | |
| Total distributions to shareholders | (4,746,974) | (3,517,433) |
| | | |
CAPITAL STOCK ISSUED AND REPURCHASED: | | |
| | | |
| Net increase from capital share transactions (Note 5) | 53,933,864 | 27,443,894 |
| | | |
| Net increase in net assets | 54,724,060 | 26,523,548 |
| | | |
NET ASSETS: | | |
| | | |
| Beginning of year | 112,964,552 | 86,441,004 |
| | | |
End of year (including undistributed net investment income of $1,059,622 and $588,863, respectively) | $167,688,612 | $112,964,552 |
The accompanying notes are an integral part of the financial statements.
20
| | For the Years Ended |
| | 12/31/06 | 12/31/05 | 12/31/04 | 12/31/03 | 12/31/02 |
| | | | | | |
Per share data (for a share outstanding | | | | | |
throughout each year): | | | | | |
| | | | | | |
Net asset value - Beginning of year | $10.90 | $10.99 | $11.04 | $11.00 | $10.54 |
| | | | | | |
| Income (loss) from investment operations: | | | | | |
| Net investment income | 0.37 | 0.37 | 0.37 | 0.41 | 0.44 |
| Net realized and unrealized gain (loss) on investments | 0.05 | (0.09) | 0.04 | 0.10 | 0.51 |
| | | | | | |
| Total from investment operations | 0.42 | 0.28 | 0.41 | 0.51 | 0.95 |
| | | | | | |
| Less distributions to shareholders: | | | | | |
| From net investment income | (0.36) | (0.36) | (0.45) | (0.41) | (0.41) |
| From net realized gain on investments | (0.01) | (0.01) | (0.01) | (0.06) | (0.08) |
| | | | | | |
| Total distributions to shareholders | (0.37) | (0.37) | (0.46) | (0.47) | (0.49) |
| | | | | | |
Net asset value - End of year | $10.95 | $10.90 | $10.99 | $11.04 | $11.00 |
| | | | | | |
Total return1 | 3.94% | 2.60% | 3.80% | 4.65% | 9.21% |
| | | | | | |
Ratios (to average net assets)/Supplemental Data: | | | | | |
| Expenses | 0.66% | 0.71% | 0.77% | 0.78% | 0.82% |
| Net investment income | 3.71% | 3.58% | 3.63% | 3.83% | 4.07% |
| | | | | | |
| Portfolio turnover | 5% | 2% | 5% | 7% | 11% |
| | | | | | |
Net assets - End of year (000's omitted) | $167,689 | $112,965 | $86,441 | $63,754 | $55,169 |
1Represents aggregate total return for the year indicated, and assumes reinvestment of all distributions.
The accompanying notes are an integral part of the financial statements.
21
Notes to Financial Statements
1. ORGANIZATION
Diversified Tax Exempt Series (the "Series") is a no-load diversified series of Manning & Napier Fund, Inc. (the “Fund”), formerly Exeter Fund, Inc. The Fund is organized in Maryland and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company.
The Series' investment objective is to provide as high a level of current income exempt from federal income tax as the Advisor believes is consistent with the preservation of capital.
The Fund’s Advisor is Manning & Napier Advisors, Inc. (the “Advisor”). Shares of the Series are offered to investors, clients and employees of the Advisor and its affiliates. The total authorized capital stock of the Fund consists of 1.7 billion shares of common stock each having a par value of $0.01. As of December 31, 2006, 1.16 billion shares have been designated in total among 21 series, of which 50 million have been designated as Diversified Tax Exempt Series Class A common stock.
2. SIGNIFICANT ACCOUNTING POLICIES
Security Valuation
Municipal securities will normally be valued on the basis of market valuations provided by an independent pricing service (the “Service”). The Service utilizes the latest price quotations and a matrix system (which considers such factors as security prices of similar securities, yields, maturities and ratings). The Service has been approved by the Fund’s Board of Directors (the “Board”).
Securities for which representative valuations or prices are not available from the Fund's pricing service may be valued at fair value as determined in good faith by the Advisor under procedures approved by and under the general supervision and responsibility of the Fund’s Board.
Short-term investments that mature in sixty days or less are valued at amortized cost, which approximates market value. Investments in open-end investment companies are valued at their net asset value per share on valuation date.
Security Transactions, Investment Income and Expenses
Security transactions are accounted for on trade date. Interest income, including amortization of premium and accretion of discounts using the effective interest method, is earned from settlement date and accrued daily. Dividend income and expenses are recorded on an accrual basis.
Most expenses of the Fund can be attributed to a specific series. Expenses which cannot be directly attributed are apportioned among the series in the Fund in such a manner as deemed equitable by the Fund's Board, taking into consideration, among other things, the nature and type of expense.
The Series uses the identified cost method for determining realized gain or loss on investments for both financial statement and federal income tax reporting purposes.
Federal Taxes
The Series' policy is to comply with the provisions of the Internal Revenue Code applicable to regulated investment companies. The Series is not subject to federal income or excise tax to the extent that the Series distributes to shareholders each year its taxable income, including any net realized gains on investments, in accordance with requirements of the Internal Revenue Code. Accordingly, no provision for federal income tax or excise tax has been made in the financial statements.
22
Notes to Financial Statements
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Distributions of Income and Gains
Distributions to shareholders of net investment income are made quarterly. Distributions of net realized gains are made annually. An additional distribution may be necessary to avoid taxation of the Series. Distributions are recorded on the ex-dividend date.
Indemnifications
The Fund’s organizational documents provide former and current directors and officers with a limited indemnification against liabilities arising in connection with the performance of their duties to the Fund. In the normal course of business, the Fund may also enter into contracts that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown as this would be dependent on future claims that may be made against the Fund. The risk of material loss from such claims is considered remote.
Other
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
3. TRANSACTIONS WITH AFFILIATES
The Fund has an Investment Advisory Agreement (the “Agreement”) with the Advisor, for which the Series pays a fee, computed daily and payable monthly, at an annual rate of 0.50% of the Series’ average daily net assets.
Under the Agreement, personnel of the Advisor provide the Series with advice and assistance in the choice of investments and the execution of securities transactions, and otherwise maintain the Series’ organization. The Advisor also provides the Fund with necessary office space and fund administration and support services. The salaries of all officers of the Fund (except a percentage of the Fund’s Chief Compliance Officer’s salary, which is paid by the Fund, and the Special Assistant Secretary’s salary, which is paid by BISYS Fund Services Ohio, Inc. (“BISYS”)), and of all Directors who are "affiliated persons" of the Fund, or of the Advisor, and all personnel of the Fund, or of the Advisor, performing services relating to research, statistical and investment activities, are paid by the Advisor. Each "non-affiliated" Director receives an annual stipend, which is allocated among all the active series of the Fund. In addition, these Directors also receive a fee per Board meeting attended for each active series of the Fund plus a fee for each committee meeting attended.
The Advisor has contractually agreed, until at least April 30, 2008, to waive its fee and, if necessary, pay other operating expenses of the Series in order to maintain total expenses for the Series at no more than 0.85% of average daily net assets each year. For the year ended December 31, 2006, the Advisor did not waive its management fee or reimburse any expenses of the Series. The Advisor is not eligible to recoup any expenses that have been waived or reimbursed in prior years.
Manning & Napier Investor Services, Inc., a registered broker-dealer affiliate of the Advisor, acts as distributor for the Fund's shares. The services of Manning & Napier Investor Services, Inc. are provided at no additional cost to the Series.
23
Notes to Financial Statements
3. TRANSACTIONS WITH AFFILIATES (continued)
For fund accounting and transfer agent services, through October 31, 2006, the Fund paid the Advisor an annual fee of 0.12% of the Fund’s average daily net assets up to $900 million, 0.09% of the Fund’s average daily net assets between $900 million and $1.5 billion, and 0.05% of the Fund’s average daily net assets over $1.5 billion. Effective November 1, 2006, the fee rates were reduced as follows: 0.11% of the Fund’s average daily net assets up to $900 million, 0.07% of the Fund’s average daily net assets between $900 million and $1.5 billion, and 0.04% of the Fund’s average daily net assets over $1.5 billion. Additionally, certain transaction and account-based fees and out-of-pocket expenses, including charges for reporting relating to the Fund’s compliance program, are charged. Expenses not directly attributable to a series are allocated based on each series’ relative net assets or number of accounts, depending on the expense. The Advisor has an agreement with BISYS under which BISYS serves as sub-accounting services and sub-transfer agent.
4. PURCHASES AND SALES OF SECURITIES
For the year ended December 31, 2006, purchases and sales of securities, other than United States Government securities and short-term securities, were $56,019,381 and $6,632,950, respectively. There were no purchases or sales of United States Government securities.
5. CAPITAL STOCK TRANSACTIONS
Transactions in shares of Diversified Tax Exempt Series were:
| | For the Year Ended 12/31/06 | For the Year Ended 12/31/05 |
| | Shares | Amount | Shares | Amount |
| Sold | 5,535,132 | $60,276,533 | 3,259,615 | $35,783,025 |
| Reinvested | 414,795 | 4,509,605 | 306,477 | 3,340,725 |
| Repurchased | (1,000,001) | (10,852,274) | (1,066,096) | (11,679,856) |
| Total | 4,949,926 | $53,933,864 | 2,499,996 | $27,443,894 |
Substantially all of the Series’ shares represent investments by fiduciary accounts over which the Advisor has sole investment discretion.
6. FINANCIAL INSTRUMENTS
The Series may trade in financial instruments with off-balance sheet risk in the normal course of its investing activities to assist in managing exposure to various market risks. These financial instruments include written options and futures contracts and may involve, to a varying degree, elements of risk in excess of the amounts recognized for financial statement purposes. No such investments were held by the Series on December 31, 2006.
7. FEDERAL INCOME TAX INFORMATION
The amount and characterization of certain income and capital gains to be distributed are determined in accordance with federal income tax regulations, which may differ from accounting principles generally accepted in the United States of America. These differences are primarily due to differing book and tax treatments in the timing of the recognition of net investment income or gains and losses, including market discount. The Series may periodically make reclas-
24
Notes to Financial Statements
7. FEDERAL INCOME TAX INFORMATION (continued)
sifications among its capital accounts to reflect income and gains available for distribution (or available capital loss carryovers) under income tax regulations, without impacting the Series' net asset value. Any such reclassifications are not reflected in the financial highlights.
The tax character of distributions paid were as follows:
| | For the Year | For the Year |
| | Ended 12/31/06 | Ended 12/31/05 |
| Ordinary income | $32,274 | $- |
| Tax exempt income | 4,580,724 | 3,408,647 |
| Long-term capital gains | 133,976 | 108,786 |
Pursuant to Section 852 of the Internal Revenue Code, as amended, the Series hereby designates the long-term capital gains disclosed above as capital gains for its taxable year ended December 31, 2006. In addition, the Series hereby designates the tax exempt income disclosed above as tax exempt dividends for the year ended December 31, 2006.
At December 31, 2006, the tax basis components of distributable earnings and the net unrealized appreciation based on identified cost for federal income tax purposes were as follows:
| Cost for federal income tax purposes | $161,909,088 |
| | |
| Unrealized appreciation | $3,283,400 |
| Unrealized depreciation | (303,976) |
| | |
| Net unrealized appreciation | $2,979,424 |
| Undistributed tax exempt income | 922,626 |
8. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement 109. FIN 48 supplements FASB Statement 109, Accounting for Income Taxes, by defining the confidence level that a tax position must meet in order to be recognized in the financial statements. FIN 48 provides guidance for how a fund should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the fund has taken or expects to take on a tax return. FIN 48 requires that the tax effects of a position be recognized only if it is “more likely than not” to be sustained based solely on its technical merits. Tax positions not deemed to meet the more likely than not threshold would be recorded as a tax benefit or expense in the current year. FIN 48 needs to be implemented no later than the first required financial statement reporting period for its fiscal year beginning after December 15, 2006 and is to be applied to all open tax years as of the effective date. At adoption, the financial statements must be adjusted to reflect only those tax positions that are more likely than not to be sustained as of the adoption date. Management of the Fund is currently evaluating the impact that FIN 48 will have on the Series’ financial statements.
In addition, in September 2006, FASB Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“FAS 157”) was issued, and is effective for fiscal years beginning after November 15, 2007. FAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosure about fair value measurements. The standard does not expand the use of fair value in any new circumstances, but provides clarification on acceptable fair value methods and applications. At this time, management is evaluating the implications of FAS 157, but it is not expected to materially impact the Series’ financial statements.
25
Report of Independent Registered Public Accounting Firm
To the Board of Directors of Manning & Napier Fund, Inc. and Shareholders of Diversified Tax Exempt Series:
In our opinion, the accompanying statement of assets and liabilities, including the investment portfolio (except for credit ratings), and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the Diversified Tax Exempt Series (a series of Manning & Napier Fund, Inc., hereafter referred to as the "Series") at December 31, 2006, and the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Series’ management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2006 by correspondence with the custodian, provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Columbus, Ohio
February 9, 2007
26
Renewal of Investment Advisory Agreement (unaudited)
At the Manning & Napier Fund, Inc. (the “Fund”) Board of Directors’ (the “Board”) annual in-person meeting, held on November 16, 2006, the Investment Advisory Agreement (the “Agreement”) between the Fund and Manning & Napier Advisors, Inc. (the “Advisor”) was reviewed by the Board for renewal. In connection with the decision whether to renew the Agreement, a variety of material was prepared for and reviewed by the Board. In addition, at the meeting of the Board, representatives of the Advisor presented additional oral and written information to help the Board evaluate the Advisor’s performance under the Agreement over the previous year. The Board then deliberated on the renewal of the Agreement in light of the various material provided prior to and at the meeting.
In connection with its review and deliberations, the Board considered the following factors and reached a conclusion with respect to such factors.
| · | The Board considered the services provided by the Advisor under the Agreement including, among others: deciding what securities to purchase and sell for each Series; arranging for the purchase and sale of such securities by placing orders with broker-dealers; administering the affairs of the Fund (including the books and records of the Fund not maintained by third party service providers such as the custodian or sub-transfer agent); arranging for the insurance coverage for the Fund; and supervising the preparation of tax returns, SEC filings (including registration statements) and reports to shareholders for the Fund. The Board discussed the quality of these services with representatives from the Advisor and concluded that the Advisor was performing its services to the Fund required under the Agreement in a reasonable manner. |
| · | The Board considered the investment performance of the various Series of the Fund. The investment performance for each Series was reviewed on a cumulative basis since inception and on a one year basis. In addition, annualized peformance for the following time periods was considered: inception, three year, five year, ten year, and current market cycle. A market cycle includes periods of both rising and falling markets. Returns for established benchmark indices for each Series were provided for each time period. In addition, the Board considered at the meeting (and considers on a quarterly basis) a peer group performance analysis consisting of Morningstar universes of mutual funds with similar investment objectives. The Board discussed the performance with representatives from the Advisor and concluded that the investment performance of each of the Fund’s Series was reasonable based on the Fund’s actual performance and comparative performance, especially performance over the current market cycle. |
| · | The Board considered the costs of the Advisor’s services and the profits of the Advisor as they relate to the Advisor’s services to the Fund under the Agreement. In reviewing the Advisor’s costs and profits, the Board discussed the Advisor’s revenues generated from the Fund (on both an actual and adjusted basis) and its expenses associated with providing the services under the Agreement. In addition, the Board reviewed the Advisor’s expenses associated with Fund activities outside of the Agreement (such as expense reimbursements pursuant to expense caps and payments made by the Advisor to third party platforms on which shares of the Fund are available for purchase). It was noted by representatives of the Advisor that 6 of the 18 active Series of the Fund are currently experiencing expenses above the capped expense ratios. After discussing the above costs and profits, the Board concluded that the Advisor’s profitability relating to its services provided under the Agreement is reasonable. |
| · | The Board considered the fees and expenses of the various Series of the Fund. The Advisor presented the advisory fees and total expenses for each Series, including the advisory fee adjusted for any expense waivers or reimbursements (either contractual or voluntary) paid by the Advisor. The advisory fees and expense ratios of each Series were compared to an average (on both a mean and median basis) of similar funds as disclosed on the Morningstar database. Representatives of the Advisor discussed with the Board the levels of its advisory fee for each Series of the Fund and as compared to the median and mean advisory fees for similar funds as listed on Morningstar. Expense ratios for every Series, except the High Yield Bond Series, are currently below the median and mean for similar funds as listed on Morningstar. Based on their review of the information provided, the Board concluded that the fees and expenses of each Series of the Fund were reasonable on a comparative basis. |
27
Renewal of Investment Advisory Agreement (unaudited)
| · | The Board also considered the other benefits the Advisor derives from its relationship with the Fund. Such other benefits include certain research products provided by soft dollars. Given the level of soft dollar transactions involving the Fund, the Board concluded that these additional benefits to the Advisor were reasonable. |
| · | In addition to the factors described above, the Board considered the Advisor’s personnel, the Advisor’s investment strategies, the Advisor’s policies and procedures relating to compliance with personal securities transactions, and the Advisor’s reputation, expertise and resources in domestic and foreign financial markets. The Board concluded that these factors support the conclusion that the Advisor performs its services in a reasonable manner. |
| · | The Board did not consider economies of scale at this time because of the multiple uses of the Fund (for the Advisor’s discretionary investment account clients in addition to direct investors), the current profitability of the Advisor’s services to the Fund under the Agreement, and the overall size of the Fund complex. |
Based on the Board’s conclusions regarding the factors described above, the Board, including a majority of Directors that are “not interested” as defined in the Investment Company Act of 1940, approved the renewal of the Agreement for another year. In the course of their deliberations, the Directors did not identify any particular information that was all important or controlling.
28
Directors’ and Officers’ Information (unaudited)
The Statement of Additional Information provides additional information about the Fund's directors and officers and can be obtained without charge by calling 1-800-466-3863, at www.manningnapieradvisors.com, or on the EDGAR Database on the SEC Internet web site (http:\\www.sec.gov). The following chart shows certain information about the Fund's officers and directors, including their principal occupations during the last five years. Unless specific dates are provided, the individuals have held the listed positions for longer than five years.
INTERESTED DIRECTOR/OFFICER | |
| Name: | B. Reuben Auspitz* |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 59 |
| Current Position(s) Held with Fund: | Principal Executive Officer, President, Chairman & Director |
Term of Office1& Length of Time Served: | Indefinite - Director since 1984; Vice President 1984 - 2003; President since 2004; |
| | Principal Executive Officer since 2002 |
| Principal Occupation(s) During Past 5 Years: | Executive Vice President; Co-Executive Director; Executive Group Member**; Chief |
| | Compliance Officer since 2004 - Manning & Napier Advisors, Inc. President; Director - |
| | Manning & Napier Investor Services, Inc. Holds or has held one or more of |
| | the following titles for various subsidiaries and affiliates: President, Vice President, |
| | Director, Chairman, Treasurer, Chief Compliance Officer or Member. |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| | |
INDEPENDENT DIRECTORS | |
| Name: | Stephen B. Ashley |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 66 |
| Current Position(s) Held with Fund: | Director, Audit Committee Member, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1996 |
| Principal Occupation(s) During Past 5 Years: | Chairman, Director, President & Chief Executive Officer, |
| | The Ashley Group (property management and investment) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | Genesee Corp. |
| | The Ashley Group |
| | Fannie Mae |
| | |
| Name: | Peter L. Faber |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 68 |
| Current Position(s) Held with Fund: | Director, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1987 |
| Principal Occupation(s) During Past 5 Years: | Senior Counsel, McDermott, Will & Emery LLP (law firm) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | Partnership for New York City, Inc. |
| | New York Collegium |
| Name: | Harris H. Rusitzky |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 72 |
| Current Position(s) Held with Fund: | Director, Audit Committee Member, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1985 |
| Principal Occupation(s) During Past 5 Years: | President, The Greening Group (business consultants); Partner, The Restaurant Group |
| | (restaurants) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
29
Directors' and Officers' Information (unaudited)
OFFICERS | |
| Name: | Jeffrey S. Coons, Ph.D., CFA |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 43 |
| Current Position(s) Held with Fund: | Vice President |
Term of Office1& Length of Time Served: | Since 2004 |
| Principal Occupation(s) During Past 5 Years: | Co-Director of Research since 2002 & Executive Group Member**, |
| | Manning & Napier Advisors, Inc. Managing Director - Risk Management, Manning & |
| | Napier Advisors, Inc., 1993-2002. Holds one or more of the following titles for various |
| | subsidiaries and affiliates: President, Director, Treasurer or Senior Trust Officer. |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Christine Glavin |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 40 |
| Current Position(s) Held with Fund: | Principal Financial Officer, Chief Financial Officer |
Term of Office1& Length of Time Served: | Principal Financial Officer since 2002; Chief Financial Officer since 2001 |
| Principal Occupation(s) During Past 5 Years: | Fund Accounting Manager, Manning & Napier Advisors, Inc. |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Jodi L. Hedberg |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 39 |
| Current Position(s) Held with Fund: | Corporate Secretary, Chief Compliance Officer, Anti-Money Laundering Compliance |
| | Officer |
Term of Office1& Length of Time Served: | Corporate Secretary since 1997; Chief Compliance Officer since 2004 |
| Principal Occupation(s) During Past 5 Years: | Director of Compliance, Manning & Napier Advisors, Inc. and affiliates; Corporate |
| | Secretary, Manning & Napier Investor Services, Inc. since 2006 |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Alaina V. Metz |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 39 |
| Current Position(s) Held with Fund: | Special Assistant Secretary |
| Term of Office & Length of Time Served: | Indefinite - Since 2002 |
| Principal Occupation(s) During Past 5 Years: | Vice President, BISYS Fund Services Ohio, Inc. (mutual fund servicing company) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
*Interested Director, within the meaning of the Investment Company Act of 1940 by reason of his position with the Fund's investment advisor and distributor. Mr. Auspitz serves as the Executive Vice President and Director, Manning & Napier Advisors, Inc. and President and Director, Manning & Napier Investor Services, Inc., the Fund's distributor.
**The Executive Group performs the duties of the Office of the Chief Executive of Manning & Napier Advisors, Inc.
1The term of office for President, Vice President, Chief Financial Officer, and Corporate Secretary is one year and until their respective successors are chosen and qualified. All other officers' terms are indefinite.
30
Literature Requests (unaudited)
Proxy Voting Policies and Procedures
A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request:
By phone 1-800-466-3863
On the Securities and Exchange
Commission’s (SEC) web site http://www.sec.gov
Proxy Voting Record
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30th is available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
Quarterly Portfolio Holdings
The Series’ complete schedule of portfolio holdings for the 1st and 3rd quarters of each fiscal year are provided on Form N-Q, and are available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
The Series’ Form N-Q may be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
Prospectus and Statement of Additional Information (SAI)
The prospectus and SAI provide additional information about each Series, including charges, expenses and risks. These documents are available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
On the Advisor’s web site http://www.manningnapieradvisors.com
Additional information available at www.manningnapieradvisors.com
| 1. | Fund Holdings - Month-End |
| 2. | Fund Holdings - Quarter-End |
| 3. | Shareholder Report - Annual |
| 4. | Shareholder Report - Semi-Annual |
31
Manning & Napier Fund, Inc.
New York Tax Exempt Series
Annual Report
December 31, 2006
Management Discussion and Analysis (unaudited)
Dear Shareholders:
Interest rates rise and interest rates fall; when they do, so too do the market prices of fixed income securities. The one difference is that when interest rates rise, prices fall and vice versa. Over the long-term, however, the total returns generated by most municipal bonds track their coupons, or more specifically, their yields to maturity. What was interesting about 2006 is that this long-term tendency presented itself over a much shorter time period. Municipal bond investors essentially earned their coupons in 2006; total returns tracked coupons pretty closely with short-term municipal yields modestly higher (about 30 basis points (i.e., 0.30%)) at the end of the year compared to where they started the year, and long-term municipal yields modestly lower. The New York Tax Exempt Series posted similar performance versus the market over the past 12 months.
While they are not explicitly tied to the U.S. Treasury markets, like all non-government sectors of the fixed income markets, municipal bonds take their cue from what happens there. In 2006, short-term U.S. Treasury yields moved sharply higher, almost a full percentage point, as the Federal Reserve (the “Fed”) pushed its Fed Funds target up from 4.25% to 5.25% during the first six months of the year. The Fed Funds target remained unchanged during the second half of 2006. Short- to intermediate-term yields moved slightly higher during the year, as did long-term U.S. Treasury yields. This differed from what happened in the municipal bond market.
During the first quarter of the year, the Fed raised the Fed Funds target because it was concerned about the inflationary effects of a run-up in commodity prices. Crude oil traded very close to $70 a barrel and the Commodity Research Bureau Raw Industrials Index rose more than 5% during the first three months of the year. The Fed was also concerned about the inflationary effects of the increases in “resource utilization,” primarily in the labor markets. The actions of the Fed and the economic environment pushed rates higher across the entire yield curve.
During the second quarter of the year, a modest acceleration in the rate of inflation showed up in the inflation measures themselves. At the end of May, the Consumer Price Index (CPI) was growing at a year over year rate of 4.1%, a bit faster than its 3.4% growth rate in December of 2005. Looking at the same measure in a slightly different fashion, the annualized growth rate through the first five months of 2006 was 5.1%. Through May, the CPI was only rising at an annualized rate of 3.6%.
Given the volatility associated with the food and energy components of the inflation indices, the “core” rate of inflation, the index excluding its food and energy components, has become increasingly important. During the second quarter, the core rate of inflation had also accelerated; it was up 2.4% year over year in May, slightly higher than its December reading of 2.2%. Unfortunately, the annualized readings were more troubling. Through the first five months of 2005, the core CPI measure annualized at a 2.4% rate; through the first five months of 2006, it was annualizing at 3.1%. Once again, interest rates moved higher across the entire yield curve.
Things began to change during the third quarter of the year with emerging signs that inflation pressures were receding. The Fed responded by leaving the Fed Funds target unchanged at both of its meetings during the quarter. The Fed was quite straightforward when it mentioned in its August press release that “inflation pressures seem likely to moderate over time, reflecting contained inflation expectations and the cumulative effects of monetary policy.” As for economic evidence of “the cumulative effects of monetary policy,” they were fairly widespread. Various indices related to economic growth rolled over during the quarter, and the Fed’s prior policy actions definitely played a role in the universally weak readings associated with the housing market. With the Fed on hold, short-term interest rates held steady, and intermediate- and longer-term interest rates moved sharply lower.
The Fed stayed on the same policy path during the fourth quarter, deciding at both of its meetings to leave the Fed Funds target unchanged. The reasoning remained the same, “inflation pressures seem likely to moderate over time.” However as the quarter progressed, there were subtle signs that the economic environment was holding just fine. The number of new jobs created each month grew throughout the quarter. The improving labor market, along with lower oil prices, translated into higher levels of consumer confidence. And as consumer spirits rose, same store sales picked back up after a miserable year over year reading in October. Short-term interest rates remained stable with the Fed on hold; after declining early in the quarter, longer-term interest rates retraced some of those gains as the year came to a close.
1
Management Discussion and Analysis (unaudited)
While the short-end of the municipal market tracked what was occurring in the U.S. Treasury market, longer-term municipals did not follow suit for a couple of reasons. First, tax receipts at the municipal level came in quite strong, causing municipal credit quality to improve, and the effect of that was most noticeable on the longer end of the municipal yield curve. Longer-term municipals also benefited from solid demand at the individual investor level.
As for the actual performance of the New York Tax Exempt Series in 2006, it came in at 3.48%. That was slightly behind the Merrill Lynch 1-12 Year Municipal Bond Index, which returned 3.77% in 2006. The Series’ relative underperformance can be attributed to a concentration of higher quality, but lower yielding securities relative to the benchmark.
Over the longer-term interest rates and spreads will fluctuate; sometimes the cyclical and/or policy pressures will push them both higher, sometimes they will push both lower, and other times, like last year, all of the various factors will be a bit of a wash. The key to investment success requires the investor to focus on the secular (non-cyclical) trends and the fundamental forces that drive each, an approach that we apply to all of our investment decisions
We appreciate your business and wish you all the very best in the coming year.
Sincerely,
Manning & Napier Advisors, Inc.
2
Performance Update as of December 31, 2006 (unaudited)
| | Average Annual Total Returns |
| | As of December 31, 2006 |
| | One | Five | Ten | Since |
| | Year | Year | Year | Inception1 |
Manning & Napier Fund, Inc. - New York Tax Exempt Series2 | 3.48% | 4.44% | 4.76% | 4.60% |
| | | | | |
Merrill Lynch 1-12 Year Municipal Bond Index3 | 3.77% | 4.83% | 5.26% | 5.19% |
The following graph compares the value of a $10,000 investment in the Manning & Napier Fund, Inc. - New York Tax Exempt Series for the ten years ended December 31, 2006 to the Merrill Lynch 1-12 Year Municipal Bond Index.
Data for line graph to follow:
| | Manning & Napier Fund, Inc. | Merrill Lynch |
| Date | New York Tax Exempt Series2 | 1-12 Year Municipal Bond Index |
| 12/31/96 | $10,000 | $10,000 |
| 12/31/97 | 10,833 | 10,769 |
| 12/31/98 | 11,432 | 11,444 |
| 12/31/99 | 10,984 | 11,443 |
| 12/31/00 | 12,329 | 12,546 |
| 12/31/01 | 12,816 | 13,192 |
| 12/31/02 | 14,073 | 14,574 |
| 12/31/03 | 14,623 | 15,276 |
| 12/31/04 | 15,037 | 15,802 |
| 12/31/05 | 15,387 | 16,097 |
| 12/31/06 | 15,922 | 16,703 |
1Performance numbers for the Series and Index are calculated from January 17, 1994, the Series' inception date.
2The Series' performance does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. The Series' performance is historical and may not be indicative of future results.
3The Merrill Lynch 1-12 Year Municipal Bond Index is an unmanaged, market weighted index comprised of investment grade, fixed rate, coupon bearing municipal bonds with maturities greater than one year but less than twelve years. The Index returns assume reinvestment of coupons and, unlike Series returns, do not reflect any fees or expenses.
3
Shareholder Expense Example (unaudited)
As a shareholder of the Series, you may incur two types of costs: (1) transaction costs, including potential wire charges on redemptions and (2) ongoing costs, including management fees and other Series expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Series and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (July 1, 2006 to December 31, 2006).
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Series’ actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Series’ actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid during the period. You may use this information to compare the ongoing costs of investing in the Series and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transaction costs, such as potential wire charges on redemptions. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transaction costs were included, your costs would have been higher.
| | Beginning | Ending | Expenses Paid |
| | Account Value | Account Value | During Period* |
| | 7/1/06 | 12/31/06 | 7/1/06-12/31/06 |
| Actual | $1,000.00 | $1,038.90 | $3.44 |
| Hypothetical | | | |
| (5% return before expenses) | $1,000.00 | $1,021.83 | $3.41 |
*Expenses are equal to the Series’ annualized expense ratio (for the six-month period) of 0.67%, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). Expenses are based on the most recent fiscal half year; therefore, the expense ratio stated above may differ from the expense ratio stated in the financial highlights, which is based on one-year data.
4
Portfolio Composition as of December 31, 2006 (unaudited)
Data for pie chart to follow:
Bond Types1
| General Obligation Bonds | 61.3% |
| Revenue Bonds | 35.3% |
| Cash, short-term investments, and other assets, less liabilities | 3.4% |
1As a percentage of net assets.
Credit Quality Ratings2,3
| Aaa | 89.0% |
| Aa | 6.9% |
| A | 0.3% |
| Baa | 0.4% |
| Unrated investments, such as cash, short-term investments, and other assets, less liabilities | 3.4% |
2As a percentage of net assets.
3Based on ratings from Moody's, or the S&P equivalent. The Series may use different ratings provided by other rating agencies for purposes of determining compliance with the Series' investment policies.
5
Investment Portfolio - December 31, 2006
| | Credit | | |
| | Rating1 | Principal | Value |
| | (unaudited) | Amount | (Note 2) |
NEW YORK MUNICIPAL SECURITIES - 96.6% | | | |
| | | | |
| Amherst, Public Impt., G.O. Bond, FGIC, 4.625%, 3/1/2007 | Aaa | $200,000 | $200,348 |
| Arlington Central School District, G.O. Bond, MBIA, 4.625%, 12/15/2024 | Aaa | 845,000 | 868,525 |
| Arlington Central School District, G.O. Bond, MBIA, 4.625%, 12/15/2025 | Aaa | 365,000 | 374,275 |
| Beacon City School District, G.O. Bond, MBIA, 5.60%, 7/15/2019 | Aaa | 500,000 | 529,540 |
| Brookhaven, Public Impt., G.O. Bond, FGIC, 4.00%, 5/1/2023 | Aaa | 900,000 | 878,832 |
| Brookhaven, Public Impt., G.O. Bond, FGIC, 4.00%, 5/1/2024 | Aaa | 815,000 | 792,090 |
| Buffalo, Prerefunded Balance, G.O. Bond, Series A, AMBAC, 5.20%, 2/1/2010 | Aaa | 250,000 | 255,317 |
| Buffalo Fiscal Stability Authority, Sales Tax & State Aid, Revenue Bond, Series B, MBIA, 5.00%, 9/1/2016 | Aaa | 525,000 | 570,218 |
| Buffalo Municipal Water Finance Authority, Water Systems, Prerefunded Balance, Revenue Bond, Series A, FGIC, 5.00%, 7/1/2028 | Aaa | 750,000 | 773,362 |
| Cattaraugus County, Public Impt., G.O. Bond, AMBAC, 5.00%, 8/1/2007 | Aaa | 300,000 | 302,520 |
| Chautauqua County, Public Impt., G.O. Bond, Series B, MBIA, 4.50%, 12/15/2018 | Aaa | 485,000 | 508,309 |
| Clyde-Savannah Central School District, G.O. Bond, FGIC, 5.00%, 6/1/2013 | Aaa | 500,000 | 537,195 |
| Colonie, G.O. Bond, MBIA, 5.20%, 8/15/2008 | Aaa | 40,000 | 40,390 |
| Dryden Central School District, G.O. Bond, FSA, 5.50%, 6/15/2011 | Aaa | 200,000 | 201,534 |
| Dutchess County, Public Impt., Prerefunded Balance, G.O. Bond, MBIA, 4.00%, 12/15/2016 | Aaa | 315,000 | 320,374 |
| Dutchess County, Public Impt., Unrefunded Balance, G.O. Bond, MBIA, 4.00%, 12/15/2016 | Aaa | 360,000 | 366,664 |
| East Aurora Union Free School District, G.O. Bond, FGIC, 5.20%, 6/15/2011 | Aaa | 300,000 | 302,160 |
| Eastchester, Public Impt., G.O. Bond, Series B, FSA, 4.90%, 10/15/2011 | Aaa | 385,000 | 388,696 |
| Ellenville Central School District, G.O. Bond, FSA, 5.375%, 5/1/2009 | Aaa | 210,000 | 213,293 |
| Ellenville Central School District, G.O. Bond, AMBAC, 5.70%, 5/1/2011 | Aaa | 700,000 | 718,648 |
| Erie County, Public Impt., G.O. Bond, Series A, FGIC, 5.00%, 9/1/2014 | Aaa | 500,000 | 533,035 |
| Erie County, Public Impt., G.O. Bond, Series A, FGIC, 4.75%, 10/1/2016 | Aaa | 550,000 | 571,901 |
The accompanying notes are an integral part of the financial statements.
6
Investment Portfolio - December 31, 2006
| | Credit | | |
| | Rating1 | Principal | Value |
| | (unaudited) | Amount | (Note 2) |
NEW YORK MUNICIPAL SECURITIES (continued) | | | |
| | | | |
| Fairport Central School District, G.O. Bond, FSA, 5.00%, 6/1/2019 | Aaa | $500,000 | $529,685 |
| Franklin Square Union Free School District, G.O. Bond, FGIC, 5.00%, 1/15/2021 | Aaa | 520,000 | 543,182 |
| Freeport, G.O. Bond, Series A, FGIC, 4.00%, 1/15/2014 | Aaa | 540,000 | 547,787 |
| Greece Central School District, G.O. Bond, FSA, 4.60%, 6/15/2018 | Aaa | 180,000 | 185,396 |
| Hamburg Central School District, G.O. Bond, FGIC, 5.375%, 6/1/2014 | Aaa | 600,000 | 616,230 |
| Hempstead Town, Unrefunded Balance, G.O. Bond, Series B, FGIC, 5.625%, 2/1/2010 | Aaa | 165,000 | 166,927 |
| Huntington, G.O. Bond, MBIA, 5.875%, 9/1/2009 | Aaa | 45,000 | 45,167 |
| Islip, Public Impt., G.O. Bond, FGIC, 5.375%, 6/15/2015 | Aaa | 1,555,000 | 1,654,644 |
| Jamesville-Dewitt Central School District, G.O. Bond, AMBAC, 5.75%, 6/15/2009 | Aaa | 420,000 | 441,790 |
| Johnson City Central School District, G.O. Bond, FGIC, 4.25%, 6/15/2024 | Aaa | 500,000 | 498,770 |
| Johnson City Central School District, G.O. Bond, FGIC, 4.375%, 6/15/2028 | Aaa | 1,000,000 | 993,790 |
| Johnson City Central School District, G.O. Bond, FGIC, 4.375%, 6/15/2030 | Aaa | 985,000 | 974,864 |
| Le Roy Central School District, G.O. Bond, FGIC, 0.10%, 6/15/2008 | Aaa | 350,000 | 331,811 |
| Long Island Power Authority, Electric Systems, Revenue Bond, Series A, FGIC, 5.00%, 12/1/2019 | Aaa | 1,000,000 | 1,078,730 |
| Long Island Power Authority, Electric Systems, Revenue Bond, Series A, FGIC, 5.00%, 12/1/2025 | Aaa | 1,690,000 | 1,805,106 |
| Longwood Central School District at Middle Island, G.O. Bond, FSA, 5.00%, 6/15/2017 | Aaa | 250,000 | 260,010 |
| Longwood Central School District at Middle Island, G.O. Bond, FSA, 5.00%, 6/15/2018 | Aaa | 250,000 | 260,010 |
| Metropolitan Transportation Authority, Revenue Bond, Series A, FGIC, 5.00%, 11/15/2025 | Aaa | 1,500,000 | 1,587,480 |
| Metropolitan Transportation Authority, Revenue Bond, Series A, FSA, 5.00%, 11/15/2030 | Aaa | 500,000 | 524,335 |
| Metropolitan Transportation Authority, Dedicated Tax Fund, Revenue Bond, Series A, MBIA, 5.00%, 11/15/2030 | Aaa | 750,000 | 786,502 |
| Metropolitan Transportation Authority, Transportation Facilities, Prerefunded Balance, Revenue Bond, Series B, AMBAC, 5.00%, 7/1/2018 | Aaa | 1,500,000 | 1,594,695 |
| Monroe County, Water Impt., G.O. Bond, 5.25%, 2/1/2017 | Baa1 | 320,000 | 323,501 |
| Monroe County, Public Impt., G.O. Bond, AMBAC, 4.125%, 6/1/2020 | Aaa | 1,000,000 | 1,005,640 |
The accompanying notes are an integral part of the financial statements.
7
Investment Portfolio - December 31, 2006
| | Credit | | |
| | Rating1 | Principal | Value |
| | (unaudited) | Amount | (Note 2) |
NEW YORK MUNICIPAL SECURITIES (continued) | | | |
| | | | |
| Monroe County Water Authority, Revenue Bond, 5.00%, 8/1/2019 | Aa3 | $1,700,000 | $1,749,249 |
| Mount Morris Central School District, G.O. Bond, FGIC, 4.125%, 6/15/2013 | Aaa | 790,000 | 812,152 |
| Nassau County, Combined Sewer Districts, G.O. Bond, Series F, MBIA, 5.35%, 7/1/2008 | Aaa | 1,500,000 | 1,538,355 |
| Nassau County, General Impt., G.O. Bond, Series C, FSA, 5.125%, 1/1/2014 | Aaa | 500,000 | 529,490 |
| Nassau County, General Impt., G.O. Bond, Series V, AMBAC, 5.25%, 3/1/2015 | Aaa | 385,000 | 393,693 |
| Nassau County Interim Finance Authority, Sales Tax Secured, Revenue Bond, Series A, AMBAC, 4.75%, 11/15/2023 | Aaa | 1,000,000 | 1,037,360 |
| New Hyde Park Garden City Park, Union Free School District, G.O. Bond, FSA, 4.125%, 6/15/2023 | Aaa | 200,000 | 198,344 |
| New Hyde Park Garden City Park, Union Free School District, G.O. Bond, FSA, 4.125%, 6/15/2024 | Aaa | 250,000 | 246,930 |
| New York, G.O. Bond, Series I, MBIA, 5.00%, 5/15/2028 | Aaa | 1,900,000 | 1,944,935 |
| New York, G.O. Bond, Series K, FSA, 5.375%, 8/1/2020 | Aaa | 1,000,000 | 1,050,560 |
| New York City, G.O. Bond, XLCA, 5.00%, 9/1/2019 | Aaa | 500,000 | 536,800 |
| New York City, G.O. Bond, Series A, CIFG, 5.00%, 8/1/2024 | Aaa | 1,000,000 | 1,063,080 |
| New York City Municipal Water Finance Authority, Water & Sewer Systems, Revenue Bond, Series A, AMBAC, 5.00%, 6/15/2035 | Aaa | 750,000 | 791,010 |
| New York City Municipal Water Finance Authority, Water & Sewer Systems, Revenue Bond, Series B, FGIC, 5.125%, 6/15/2030 | Aaa | 2,000,000 | 2,031,220 |
| New York City Municipal Water Finance Authority, Water & Sewer Systems, Revenue Bond, Series D, AMBAC, 4.50%, 6/15/2036 | Aaa | 500,000 | 500,375 |
| New York City Municipal Water Finance Authority, Revenue Bond, Series E, FGIC, 5.00%, 6/15/2026 | Aaa | 750,000 | 781,598 |
| New York City Transitional Finance Authority, Future Tax Secured, Prerefunded Balance, Revenue Bond, Series A, 5.50%, 2/15/2011 | Aa1 | 1,000,000 | 1,064,170 |
| New York State, G.O. Bond, Series A, 4.60%, 3/15/2013 | Aa3 | 475,000 | 495,435 |
| New York State, G.O. Bond, Series A, 4.50%, 3/15/2019 | Aa3 | 500,000 | 517,255 |
| New York State, Prerefunded Balance, G.O. Bond, Series B, 5.125%, 3/1/2018 | Aa3 | 1,000,000 | 1,027,940 |
| New York State, G.O. Bond, Series C, FSA, 5.00%, 4/15/2012 | Aa3 | 700,000 | 746,473 |
| New York State, Prerefunded Balance, G.O. Bond, Series D, AMBAC, 5.00%, 7/15/2015 | Aaa | 500,000 | 515,835 |
The accompanying notes are an integral part of the financial statements.
8
Investment Portfolio - December 31, 2006
| | Credit | | |
| | Rating1 | Principal | Value |
| | (unaudited) | Amount | (Note 2) |
NEW YORK MUNICIPAL SECURITIES (continued) | | | |
| | | | |
| New York State Dormitory Authority, Columbia University, Revenue Bond, Series A, 5.00%, 7/1/2025 | Aaa | $500,000 | $527,520 |
| New York State Environmental Facilities Corp., Clean Water & Drinking, Revenue Bond, MBIA, 5.00%, 6/15/2021 | Aaa | 600,000 | 635,808 |
| New York State Environmental Facilities Corp., Clean Water & Drinking, Revenue Bond, 4.50%, 6/15/2022 | Aaa | 300,000 | 306,576 |
| New York State Environmental Facilities Corp., Clean Water & Drinking, Revenue Bond, Series B, 5.00%, 6/15/2027 | Aaa | 1,000,000 | 1,044,120 |
| New York State Environmental Facilities Corp., Personal Income Tax, Revenue Bond, Series A, 5.00%, 12/15/2019 | AAA2 | 750,000 | 807,172 |
| New York State Environmental Facilities Corp., Pollution Control, Revenue Bond, Series B, 6.65%, 9/15/2013 | Aaa | 250,000 | 264,430 |
| New York State Environmental Facilities Corp., Pollution Control, Revenue Bond, Series E, MBIA, 5.00%, 6/15/2012 | Aaa | 200,000 | 203,194 |
| New York State Environmental Facilities Corp., Pollution Control, Revenue Bond, Series A, 4.65%, 6/15/2007 | Aaa | 110,000 | 110,491 |
| New York State Environmental Facilities Corp., Pollution Control, Unrefunded Balance, Revenue Bond, Series B, 5.20%, 5/15/2014 | Aaa | 440,000 | 472,318 |
| New York State Environmental Facilities Corp., Pollution Control, Revenue Bond, Series A, 5.20%, 6/15/2015 | Aaa | 25,000 | 25,529 |
| New York State Housing Finance Agency, State University Construction, Revenue Bond, Series A, 8.00%, 5/1/2011 | A1 | 250,000 | 275,080 |
| New York State Thruway Authority, Highway & Bridge, Prerefunded Balance, Revenue Bond, Series A, FGIC, 5.50%, 4/1/2015 | Aaa | 320,000 | 346,390 |
| New York State Thruway Authority, Highway & Bridge, Prerefunded Balance, Revenue Bond, Series A, AMBAC, 5.25%, 4/1/2017 | Aaa | 555,000 | 568,253 |
| New York State Thruway Authority, Revenue Bond, Series F, AMBAC, 5.00%, 1/1/2026 | Aaa | 340,000 | 360,941 |
| New York State Thruway Authority, Highway & Bridge, Prerefunded Balance, Revenue Bond, Series B, MBIA, 5.25%, 4/1/2016 | Aaa | 300,000 | 321,306 |
| New York State Thruway Authority, Highway & Bridge, Revenue Bond, Series C, MBIA, 5.25%, 4/1/2011 | Aaa | 1,000,000 | 1,062,880 |
| New York State Thruway Authority, Highway & Bridge, Revenue Bond, Series C, AMBAC, 5.00%, 4/1/2020 | Aaa | 750,000 | 793,200 |
| New York State Thruway Authority, Personal Income Tax, Revenue Bond, Series A, FSA, 5.00%, 3/15/2014 | Aaa | 500,000 | 536,265 |
The accompanying notes are an integral part of the financial statements.
9
Investment Portfolio - December 31, 2006
| | Credit | | |
| | Rating1 | Principal | Value |
| | (unaudited) | Amount | (Note 2) |
NEW YORK MUNICIPAL SECURITIES (continued) | | | |
| | | | |
| New York State Thruway Authority, Personal Income Tax, Revenue Bond, Series A, MBIA, 5.00%, 3/15/2016 | Aaa | $300,000 | $321,243 |
| New York State Urban Development Corp., Prerefunded Balance, Revenue Bond, 5.375%, 7/1/2022 | Aaa | 195,000 | 200,259 |
| New York State Urban Development Corp., Unrefunded Balance, Revenue Bond, 5.375%, 7/1/2022 | Aaa | 205,000 | 209,377 |
| New York State Urban Development Corp., Correctional Capital Facilities, Revenue Bond, Series A, FSA, 5.25%, 1/1/2014 | Aaa | 500,000 | 536,555 |
| Niagara County, G.O. Bond, Series B, MBIA, 5.20%, 1/15/2011 | Aaa | 400,000 | 403,400 |
| Niagara Falls City School District, G.O. Bond, FSA, 4.375%, 9/15/2029 | AAA2 | 885,000 | 881,787 |
| North Hempstead, G.O. Bond, Series A, FGIC, 4.75%, 1/15/2023 | Aaa | 1,000,000 | 1,022,230 |
| Norwich City School District, G.O. Bond, FSA, 5.00%, 6/15/2010 | Aaa | 250,000 | 261,215 |
| Panama Central School District, G.O. Bond, FGIC, 5.00%, 6/15/2019 | Aaa | 595,000 | 630,510 |
| Patchogue-Medford Union Free School District, G.O. Bond, Series A, FGIC, 3.50%, 7/1/2012 | Aaa | 805,000 | 802,601 |
| Pavilion Central School District, G.O. Bond, FSA, 5.625%, 6/15/2018 | Aaa | 880,000 | 929,870 |
| Phelps-Clifton Springs Central School District, G.O. Bond, Series B, MBIA, 5.00%, 6/15/2021 | Aaa | 850,000 | 913,563 |
| Phelps-Clifton Springs Central School District, G.O. Bond, Series B, MBIA, 5.00%, 6/15/2022 | Aaa | 450,000 | 483,935 |
| Ramapo, Public Impt., G.O. Bond, Series B, MBIA, 4.375%, 5/1/2031 | Aaa | 435,000 | 435,674 |
| Ramapo, Public Impt., G.O. Bond, Series B, MBIA, 4.375%, 5/1/2032 | Aaa | 510,000 | 510,439 |
| Ramapo, Public Impt., G.O. Bond, Series B, MBIA, 4.50%, 5/1/2033 | Aaa | 410,000 | 414,658 |
| Ravena Coeymans Selkirk Central School District, G.O. Bond, FSA, 4.25%, 6/15/2014 | Aaa | 1,180,000 | 1,218,149 |
| Rochester, G.O. Bond, Series A, AMBAC, 5.00%, 8/15/2020 | Aaa | 250,000 | 278,005 |
| Rochester, G.O. Bond, Series A, AMBAC, 5.00%, 8/15/2022 | Aaa | 95,000 | 106,073 |
| Rondout Valley Central School District, G.O. Bond, FSA, 5.375%, 3/1/2020 | Aaa | 500,000 | 530,710 |
| Sachem Central School District of Holbrook, G.O Bond, Series B, FGIC, 4.25%, 10/15/2026 | Aaa | 1,200,000 | 1,185,684 |
| Schenectady, G.O. Bond, MBIA, 5.30%, 2/1/2011 | Aaa | 250,000 | 255,340 |
| Scotia Glenville Central School District, G.O. Bond, FGIC, 5.50%, 6/15/2020 | Aaa | 1,025,000 | 1,081,590 |
The accompanying notes are an integral part of the financial statements.
10
Investment Portfolio - December 31, 2006
| | Credit | | |
| | Rating1 | Principal | Value |
| | (unaudited) | Amount | (Note 2) |
NEW YORK MUNICIPAL SECURITIES (continued) | | | |
| | | | |
| South Glens Falls Central School District, G.O. Bond, FGIC, 5.375%, 6/15/2018 | Aaa | $605,000 | $636,635 |
| South Glens Falls Central School District, Unrefunded Balance, G.O. Bond, FGIC, 5.375%, 6/15/2018 | Aaa | 95,000 | 99,783 |
| South Huntington Union Free School District, G.O. Bond, FGIC, 5.00%, 9/15/2016 | Aaa | 325,000 | 338,527 |
| South Huntington Union Free School District, G.O. Bond, FGIC, 5.10%, 9/15/2017 | Aaa | 100,000 | 104,337 |
| Suffolk County, G.O. Bond, Series A, FGIC, 4.75%, 8/1/2019 | Aaa | 895,000 | 920,445 |
| Suffolk County, Public Impt., G.O. Bond, Series A, MBIA, 4.25%, 5/1/2024 | Aaa | 1,000,000 | 1,003,010 |
| Suffolk County Water Authority, Revenue Bond, MBIA, 5.10%, 6/1/2009 | Aaa | 55,000 | 56,986 |
| Suffolk County Water Authority, Unrefunded Balance, Revenue Bond, MBIA, 5.10%, 6/1/2009 | Aaa | 195,000 | 201,858 |
| Suffolk County Water Authority, Prerefunded Balance, Revenue Bond, Series A, AMBAC, 5.00%, 6/1/2017 | Aaa | 400,000 | 410,196 |
| Suffolk County Water Authority, Revenue Bond, MBIA, 4.50%, 6/1/2027 | Aaa | 1,160,000 | 1,167,238 |
| Sullivan County, Public Impt., G.O. Bond, MBIA, 5.125%, 3/15/2013 | Aaa | 330,000 | 330,396 |
| Syracuse, Public Impt., G.O. Bond, Series C, AMBAC, 5.40%, 8/1/2017 | Aaa | 700,000 | 747,957 |
| Syracuse, Public Impt., G.O. Bond, Series C, AMBAC, 5.50%, 8/1/2018 | Aaa | 850,000 | 911,073 |
| Syracuse, Public Impt., G.O. Bond, Series A, MBIA, 4.25%, 6/15/2023 | Aaa | 690,000 | 693,195 |
| Syracuse, Public Impt., G.O. Bond, Series A, MBIA, 4.375%, 6/15/2025 | Aaa | 990,000 | 999,544 |
| Triborough Bridge & Tunnel Authority, General Purposes, Revenue Bond, Series B, 5.00%, 11/15/2020 | Aa2 | 750,000 | 796,170 |
| Triborough Bridge & Tunnel Authority, General Purposes, Prerefunded Balance, Revenue Bond, Series A, MBIA, 4.75%, 1/1/2019 | Aaa | 300,000 | 320,721 |
| Triborough Bridge & Tunnel Authority, General Purposes, Prerefunded Balance, Revenue Bond, Series A, MBIA, 5.00%, 1/1/2032 | Aaa | 1,695,000 | 1,802,005 |
| Triborough Bridge & Tunnel Authority, General Purposes, Unrefunded Balance, Revenue Bond, Series A, MBIA, 5.00%, 1/1/2032 | Aaa | 305,000 | 319,417 |
| Triborough Bridge & Tunnel Authority, Subordinate Bonds, Revenue Bond, FGIC, 5.00%, 11/15/2032 | Aaa | 1,000,000 | 1,059,570 |
The accompanying notes are an integral part of the financial statements.
11
Investment Portfolio - December 31, 2006
| | Credit | Principal | |
| | Rating1 | | Value |
| | (unaudited) | Shares | (Note 2) |
NEW YORK MUNICIPAL SECURITIES (continued) | | | |
| | | | |
| Ulster County, Public Impt., G.O. Bond, XLCA, 4.50%,11/15/2026 | AAA2 | $560,000 | $569,643 |
| Warwick Valley Central School District, G.O. Bond, FSA, 5.60%, 1/15/2018 | Aaa | 575,000 | 612,996 |
| Warwick Valley Central School District, G.O. Bond, FSA, 5.625%, 1/15/2022 | Aaa | 380,000 | 405,380 |
| Wayne County, Public Impt., G.O. Bond, MBIA, 4.125%, 6/1/2024 | Aaa | 500,000 | 496,915 |
| West Seneca Central School District, G.O. Bond, FSA, 5.00%, 5/1/2011 | Aaa | 300,000 | 316,224 |
| Westchester County, Unrefunded Balance, G.O. Bond, Series A, 4.75%, 12/15/2008 | Aaa | 5,000 | 5,051 |
| Westchester County, Unrefunded Balance, G.O. Bond, Series A, 4.75%, 12/15/2009 | Aaa | 5,000 | 5,050 |
| Westchester County, G.O. Bond, Series B, 4.30%, 12/15/2011 | Aaa | 15,000 | 15,480 |
| Westchester County, G.O. Bond, Series B, 3.70%, 12/15/2015 | Aaa | 1,000,000 | 998,480 |
| Westhampton Beach Union Free School District, G.O. Bond, MBIA, 4.00%, 7/15/2018 | Aaa | 726,000 | 729,906 |
| William Floyd Union Free School District of the Mastics-Moriches-Shirley, G.O. Bond, AMBAC, 5.70%, 6/15/2008 | Aaa | 405,000 | 416,826 |
| Williamsville Central School District, G.O. Bond, MBIA, 5.00%, 6/15/2012 | Aaa | 490,000 | 522,227 |
| Wyandanch Union Free School District, G.O. Bond, FSA, 5.60%, 4/1/2017 | Aaa | 500,000 | 507,425 |
| Yonkers, G.O. Bond, Series B, MBIA, 5.00%, 8/1/2023 | Aaa | 1,125,000 | 1,195,965 |
| Yonkers, G.O. Bond, Series B, MBIA, 5.00%, 8/1/2030 | Aaa | 1,095,000 | 1,158,390 |
| | | | |
TOTAL NEW YORK MUNICIPAL SECURITIES | | | |
| (Identified Cost $87,584,909) | | | 89,724,898 |
| | | | |
SHORT-TERM INVESTMENTS - 2.4% | | | |
| Dreyfus BASIC New York Municipal Money Market Fund | | | |
| (Identified Cost $2,295,141) | | 2,295,141 | 2,295,141 |
| | | | |
TOTAL INVESTMENTS - 99.0% | | | |
| (Identified Cost $89,880,050) | | | 92,020,039 |
| | | | |
OTHER ASSETS, LESS LIABILITIES - 1.0% | | | 890,217 |
| | | | |
NET ASSETS - 100% | | | $92,910,256 |
The accompanying notes are an integral part of the financial statements.
12
Investment Portfolio - December 31, 2006
KEY:
G.O. Bond - General Obligation Bond
Impt. - Improvement
Scheduled principal and interest payments are guaranteed by:
AMBAC (AMBAC Assurance Corp.)
CIFG (CIFG North America, Inc.)
FGIC (Financial Guaranty Insurance Co.)
FSA (Financial Security Assurance)
MBIA (MBIA, Inc.)
XLCA (XL Capital Assurance)
The insurance does not guarantee the market value of the municipal bonds.
1Credit ratings from Moody's (unaudited).
2Credit ratings from S&P (unaudited).
The Series' portfolio holds, as a percentage of net assets, greater than 10% in bonds insured by the following companies: FGIC - 29.3%; MBIA - 26.8%; AMBAC - 13.1%; FSA - 13.0%.
The accompanying notes are an integral part of the financial statements.
13
Statement of Assets and Liabilities
December 31, 2006
ASSETS: | |
| | |
| Investments, at value (identified cost $89,880,050) (Note 2) | $92,020,039 |
| Interest receivable | 959,062 |
| Dividends receivable | 3,158 |
| Receivable for fund shares sold | 50 |
| | |
| TOTAL ASSETS | 92,982,309 |
| | |
LIABILITIES: | |
| | |
| Accrued management fees (Note 3) | 39,169 |
| Accrued fund accounting and transfer agent fees (Note 3) | 7,693 |
| Accrued Chief Compliance Officer service fees (Note 3) | 429 |
| Accrued directors' fees (Note 3) | 192 |
| Audit fees payable | 24,404 |
| Other payables and accrued expenses | 166 |
| | |
| TOTAL LIABILITIES | 72,053 |
| | |
TOTAL NET ASSETS | $92,910,256 |
| | |
NET ASSETS CONSIST OF: | |
| | |
| Capital stock | $88,970 |
| Additional paid-in-capital | 90,077,727 |
| Undistributed net investment income | 579,880 |
| Accumulated net realized gain on investments | 23,690 |
| Net unrealized appreciation on investments | 2,139,989 |
| | |
TOTAL NET ASSETS | $92,910,256 |
| | |
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE ($92,910,256/8,896,972 shares) | $10.44 |
The accompanying notes are an integral part of the financial statements.
14
For the Year Ended December 31, 2006
INVESTMENT INCOME: | |
| | |
| Interest | $3,767,269 |
| Dividends | 80,955 |
| | |
| Total Investment Income | 3,848,224 |
| | |
EXPENSES: | |
| | |
| Management fees (Note 3) | 441,288 |
| Fund accounting and transfer agent fees (Note 3) | 96,663 |
| Directors' fees (Note 3) | 7,100 |
| Chief Compliance Officer service fees (Note 3) | 6,195 |
| Custodian fees | 6,501 |
| Miscellaneous | 40,715 |
| | |
| Total Expenses | 598,462 |
| | |
| NET INVESTMENT INCOME | 3,249,762 |
| | |
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: | |
| | |
| Net realized gain on investments | 47,602 |
| Net change in unrealized appreciation on investments | (158,257) |
| | |
| NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS | (110,655) |
| | |
| NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS | $3,139,107 |
The accompanying notes are an integral part of the financial statements.
15
Statements of Changes in Net Assets
| | For the | For the |
| | Year Ended | Year Ended |
| | 12/31/06 | 12/31/05 |
INCREASE (DECREASE) IN NET ASSETS: | | |
| | | |
OPERATIONS: | | |
| | | |
| Net investment income | $3,249,762 | $2,816,400 |
| Net realized gain on investments | 47,602 | 91,450 |
| Net change in unrealized appreciation on investments | (158,257) | (1,163,352) |
| | | |
| Net increase from operations | 3,139,107 | 1,744,498 |
| | | |
DISTRIBUTIONS TO SHAREHOLDERS (Note 8): | | |
| | | |
| From net investment income | (3,059,006) | (2,708,429) |
| From net realized gain on investments | (48,419) | (97,103) |
| | | |
| Total distributions to shareholders | (3,107,425) | (2,805,532) |
| | | |
CAPITAL STOCK ISSUED AND REPURCHASED: | | |
| | | |
| Net increase from capital share transactions (Note 5) | 10,473,150 | 7,646,554 |
| | | |
| Net increase in net assets | 10,504,832 | 6,585,520 |
| | | |
NET ASSETS: | | |
| | | |
| Beginning of year | 82,405,424 | 75,819,904 |
| | | |
End of year (including undistributed net investment income of $579,880 and $395,593, respectively) | $92,910,256 | $82,405,424 |
The accompanying notes are an integral part of the financial statements.
16
| | For the Years Ended |
| | 12/31/06 | 12/31/05 | 12/31/04 | 12/31/03 | 12/31/02 |
| | | | | | |
Per share data (for a share outstanding | | | | | |
throughout each year): | | | | | |
| | | | | | |
| Net asset value - Beginning of year | $10.45 | $10.58 | $10.77 | $10.89 | $10.36 |
| | | | | | |
| Income (loss) from investment operations: | | | | | |
| Net investment income | 0.38 | 0.37 | 0.36 | 0.42 | 0.46 |
| Net realized and unrealized gain (loss) on investments | (0.02) | (0.13) | (0.07) | -2 | 0.54 |
| | | | | | |
| Total from investment operations | 0.36 | 0.24 | 0.29 | 0.42 | 1.00 |
| | | | | | |
| Less distributions to shareholders: | | | | | |
| From net investment income | (0.36) | (0.36) | (0.45) | (0.41) | (0.42) |
| From net realized gain on investments | (0.01) | (0.01) | (0.03) | (0.13) | (0.05) |
| | | | | | |
| Total distributions to shareholders | (0.37) | (0.37) | (0.48) | (0.54) | (0.47) |
| | | | | | |
Net asset value - End of year | $10.44 | $10.45 | $10.58 | $10.77 | $10.89 |
| | | | | | |
Total return1 | 3.48% | 2.33% | 2.83% | 3.90% | 9.81% |
| | | | | | |
Ratios (to average net assets)/Supplemental Data: | | | | | |
| Expenses | 0.68% | 0.72% | 0.75% | 0.75%* | 0.73% |
| Net investment income | 3.68% | 3.55% | 3.57% | 3.80% | 4.20% |
| | | | | | |
| Portfolio turnover | 8% | 6% | 7% | 17% | 6% |
| | | | | | |
Net assets - End of year (000's omitted) | $92,910 | $82,405 | $75,820 | $64,193 | $63,961 |
*The investment advisor did not impose all of its management fee. If these expenses had been incurred by the Series, the expense ratio (to average net assets) for the year ended 12/31/03 would have been increased by 0.00%3.
1Represents aggregate total return for the year indicated, and assumes reinvestment of all distributions. Total return would have been lower had certain expenses not been waived during the year ended 12/31/03.
2Less than $0.01 per share.
3 Less than 0.01%.
The accompanying notes are an integral part of the financial statements.
17
Notes to Financial Statements
1. ORGANIZATION
New York Tax Exempt Series (the "Series") is a no-load diversified series of Manning & Napier Fund, Inc. (the “Fund”), formerly Exeter Fund, Inc. The Fund is organized in Maryland and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company.
The Series' investment objective is to provide as high a level of current income exempt from federal income tax and New York State personal income tax as the Advisor believes is consistent with the preservation of capital.
The Fund’s Advisor is Manning & Napier Advisors, Inc. (the “Advisor”). Shares of the Series are offered to investors, clients and employees of the Advisor and its affiliates. The total authorized capital stock of the Fund consists of 1.7 billion shares of common stock each having a par value of $0.01. As of December 31, 2006, 1.16 billion shares have been designated in total among 21 series, of which 50 million have been designated as New York Tax Exempt Series Class A common stock.
2. SIGNIFICANT ACCOUNTING POLICIES
Security Valuation
Municipal securities will normally be valued on the basis of market valuations provided by an independent pricing service (the “Service”). The Service utilizes the latest price quotations and a matrix system (which considers such factors as security prices of similar securities, yields, maturities and ratings). The Service has been approved by the Fund’s Board of Directors (the “Board”).
Securities for which representative valuations or prices are not available from the Fund's pricing service may be valued at fair value as determined in good faith by the Advisor under procedures approved by and under the general supervision and responsibility of the Fund's Board.
Short-term investments that mature in sixty days or less are valued at amortized cost, which approximates market value. Investments in open-end investment companies are valued at their net asset value per share on valuation date.
Security Transactions, Investment Income and Expenses
Security transactions are accounted for on trade date. Interest income, including amortization of premium and accretion of discounts using the effective interest method, is earned from settlement date and accrued daily. Dividend income and expenses are recorded on an accrual basis.
Most expenses of the Fund can be attributed to a specific series. Expenses which cannot be directly attributed are apportioned among the series in the Fund in such a manner as deemed equitable by the Fund's Board, taking into consideration, among other things, the nature and type of expense.
The Series uses the identified cost method for determining realized gain or loss on investments for both financial statement and federal income tax reporting purposes.
Federal Taxes
The Series' policy is to comply with the provisions of the Internal Revenue Code applicable to regulated investment companies. The Series is not subject to federal income or excise tax to the extent that the Series distributes to shareholders each year its taxable income, including any net realized gains on investments, in accordance with requirements of the Internal Revenue Code. Accordingly, no provision for federal income tax or excise tax has been made in the financial statements.
18
Notes to Financial Statements
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Distributions of Income and Gains
Distributions to shareholders of net investment income are made quarterly. Distributions of net realized gains are made annually. An additional distribution may be necessary to avoid taxation of the Series. Distributions are recorded on the ex-dividend date.
Indemnifications
The Fund’s organizational documents provide former and current directors and officers with a limited indemnification against liabilities arising in connection with the performance of their duties to the Fund. In the normal course of business, the Fund may also enter into contracts that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown as this would be dependent on future claims that may be made against the Fund. The risk of material loss from such claims is considered remote.
Other
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
3. TRANSACTIONS WITH AFFILIATES
The Fund has an Investment Advisory Agreement (the “Agreement”) with the Advisor, for which the Series pays a fee, computed daily and payable monthly, at an annual rate of 0.50% of the Series’ average daily net assets.
Under the Agreement, personnel of the Advisor provide the Series with advice and assistance in the choice of investments and the execution of securities transactions, and otherwise maintain the Series’ organization. The Advisor also provides the Fund with necessary office space and fund administration and support services. The salaries of all officers of the Fund (except a percentage of the Fund’s Chief Compliance Officer’s salary, which is paid by the Fund, and the Special Assistant Secretary’s salary, which is paid by BISYS Fund Services Ohio, Inc. (“BISYS”)), and of all Directors who are "affiliated persons" of the Fund, or of the Advisor, and all personnel of the Fund, or of the Advisor, performing services relating to research, statistical and investment activities, are paid by the Advisor. Each "non-affiliated" Director receives an annual stipend, which is allocated among all the active series of the Fund. In addition, these Directors also receive a fee per Board meeting attended for each active series of the Fund plus a fee for each committee meeting attended.
The Advisor has contractually agreed, until at least April 30, 2008, to waive its fee and, if necessary, pay other operating expenses of the Series in order to maintain total expenses for the Series at no more than 0.85% of average daily net assets each year. For the year ended December 31, 2006, the Advisor did not waive its management fee or reimburse any expenses of the Series. The Advisor is not eligible to recoup any expenses that have been waived or reimbursed in prior years.
Manning & Napier Investor Services, Inc., a registered broker-dealer affiliate of the Advisor, acts as distributor for the Fund's shares. The services of Manning & Napier Investor Services, Inc. are provided at no additional cost to the Series.
19
Notes to Financial Statements
3. TRANSACTIONS WITH AFFILIATES (continued)
For fund accounting and transfer agent services, through October 31, 2006, the Fund paid the Advisor an annual fee of 0.12% of the Fund’s average daily net assets up to $900 million, 0.09% of the Fund’s average daily net assets between $900 million and $1.5 billion, and 0.05% of the Fund’s average daily net assets over $1.5 billion. Effective November 1, 2006, the fee rates were reduced as follows: 0.11% of the Fund’s average daily net assets up to $900 million, 0.07% of the Fund’s average daily net assets between $900 million and $1.5 billion, and 0.04% of the Fund’s average daily net assets over $1.5 billion. Additionally, certain transaction and account-based fees and out-of-pocket expenses, including charges for reporting relating to the Fund’s compliance program, are charged. Expenses not directly attributable to a series are allocated based on each series’ relative net assets or number of accounts, depending on the expense. The Advisor has an agreement with BISYS under which BISYS serves as sub-accounting services and sub-transfer agent.
4. PURCHASES AND SALES OF SECURITIES
For the year ended December 31, 2006, purchases and sales of securities, other than United States Government securities and short-term securities, were $18,208,462 and $6,923,325, respectively. There were no purchases or sales of United States Government securities.
5. CAPITAL STOCK TRANSACTIONS
Transactions in shares of New York Tax Exempt Series were:
| | For the Year | For the Year |
| | Ended 12/31/06 | Ended 12/31/05 |
| | Shares | Amount | Shares | Amount |
| | | | | |
| Sold | 1,332,286 | $13,874,257 | 1,217,413 | $12,838,558 |
| Reinvested | 283,436 | 2,944,568 | 252,977 | 2,650,023 |
| Repurchased | (608,138) | (6,345,675) | (744,729) | (7,842,027) |
| Total | 1,007,584 | $10,473,150 | 725,661 | $7,646,554 |
Substantially all of the Series’ shares represent investments by fiduciary accounts over which the Advisor has sole investment discretion.
6. FINANCIAL INSTRUMENTS
The Series may trade in financial instruments with off-balance sheet risk in the normal course of its investing activities to assist in managing exposure to various market risks. These financial instruments include written options and futures contracts and may involve, to a varying degree, elements of risk in excess of the amounts recognized for financial statement purposes. No such investments were held by the Series on December 31, 2006.
7. CONCENTRATION OF CREDIT
The Series primarily invests in debt obligations issued by the State of New York and its political subdivisions, agencies and public authorities to obtain funds for various public purposes. The Series is more susceptible to factors adversely affecting issues of New York municipal securities than is a municipal bond fund that is not concentrated in these issues to the same extent.
8. FEDERAL INCOME TAX INFORMATION
The amount and characterization of certain income and capital gains to be distributed are determined in accordance with federal income tax regulations, which may differ from accounting
20
Notes to Financial Statements
8. FEDERAL INCOME TAX INFORMATION (continued)
principles generally accepted in the United States of America. These differences are primarily due to differing book and tax treatments in the timing of the recognition of net investment income or gains and losses, including market discount. The Series may periodically make reclassifications among its capital accounts to reflect income and gains available for distribution (or available capital loss carryovers) under income tax regulations, without impacting the Series’ net asset value. Any such reclassifications are not reflected in the financial highlights.
The tax character of distributions paid were as follows:
| | For the Year | For the Year |
| | Ended 12/31/06 | Ended 12/31/05 |
| | | |
| Ordinary income | $10,775 | $- |
| Tax exempt income | 3,048,231 | 2,708,429 |
| Long-term capital gains | 48,419 | 97,103 |
Pursuant to Section 852 of the Internal Revenue Code, as amended, the Series hereby designates the long-term capital gains disclosed above as capital gains for its taxable year ended December 31, 2006. In addition, the Series hereby designates the tax exempt income disclosed above as tax exempt dividends for the year ended December 31, 2006.
At December 31, 2006, the tax basis components of distributable earnings and the net unrealized appreciation based on identified cost for federal income tax purposes were as follows:
| Cost for federal income tax purposes | $89,847,796 |
| | |
| Unrealized appreciation | $2,367,754 |
| Unrealized depreciation | (195,511) |
| | |
| Net unrealized appreciation | $2,172,243 |
| Undistributed tax exempt income | 547,626 |
| Undistributed long-term capital gains | 23,690 |
9. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement 109. FIN 48 supplements FASB Statement 109, Accounting for Income Taxes, by defining the confidence level that a tax position must meet in order to be recognized in the financial statements. FIN 48 provides guidance for how a fund should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the fund has taken or expects to take on a tax return. FIN 48 requires that the tax effects of a position be recognized only if it is “more likely than not” to be sustained based solely on its technical merits. Tax positions not deemed to meet the more likely than not threshold would be recorded as a tax benefit or expense in the current year. FIN 48 needs to be implemented no later than the first required financial statement reporting period for its fiscal year beginning after December 15, 2006 and is to be applied to all open tax years as of the effective date. At adoption, the financial statements must be adjusted to reflect only those tax positions that are more likely than not to be sustained as of the adoption date. Management of the Fund is currently evaluating the impact that FIN 48 will have on the Series’ financial statements.
In addition, in September 2006, FASB Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“FAS 157”) was issued, and is effective for fiscal years beginning after November 15, 2007. FAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosure about fair value measurements. The standard does not expand the use of fair value in any new circumstances, but provides clarification on acceptable fair value methods and applications. At this time, management is evaluating the implications of FAS 157, but it is not expected to materially impact the Series’ financial statements.
21
Report of Independent Registered Public Accounting Firm
To the Board of Directors of Manning & Napier Fund, Inc. and Shareholders of New York Tax Exempt Series:
In our opinion, the accompanying statement of assets and liabilities, including the investment portfolio (except for credit ratings), and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the New York Tax Exempt Series (a series of Manning & Napier Fund, Inc., hereafter referred to as the "Series") at December 31, 2006, and the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Series’ management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2006 by correspondence with the custodian, provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Columbus, Ohio
February 9, 2007
22
Renewal of Investment Advisory Agreement (unaudited)
At the Manning & Napier Fund, Inc. (the “Fund”) Board of Directors’ (the “Board”) annual in-person meeting, held on November 16, 2006, the Investment Advisory Agreement (the “Agreement”) between the Fund and Manning & Napier Advisors, Inc. (the “Advisor”) was reviewed by the Board for renewal. In connection with the decision whether to renew the Agreement, a variety of material was prepared for and reviewed by the Board. In addition, at the meeting of the Board, representatives of the Advisor presented additional oral and written information to help the Board evaluate the Advisor’s performance under the Agreement over the previous year. The Board then deliberated on the renewal of the Agreement in light of the various material provided prior to and at the meeting.
In connection with its review and deliberations, the Board considered the following factors and reached a conclusion with respect to such factors.
| · | The Board considered the services provided by the Advisor under the Agreement including, among others: deciding what securities to purchase and sell for each Series; arranging for the purchase and sale of such securities by placing orders with broker-dealers; administering the affairs of the Fund (including the books and records of the Fund not maintained by third party service providers such as the custodian or sub-transfer agent); arranging for the insurance coverage for the Fund; and supervising the preparation of tax returns, SEC filings (including registration statements) and reports to shareholders for the Fund. The Board discussed the quality of these services with representatives from the Advisor and concluded that the Advisor was performing its services to the Fund required under the Agreement in a reasonable manner. |
| · | The Board considered the investment performance of the various Series of the Fund. The investment performance for each Series was reviewed on a cumulative basis since inception and on a one year basis. In addition, annualized peformance for the following time periods was considered: inception, three year, five year, ten year, and current market cycle. A market cycle includes periods of both rising and falling markets. Returns for established benchmark indices for each Series were provided for each time period. In addition, the Board considered at the meeting (and considers on a quarterly basis) a peer group performance analysis consisting of Morningstar universes of mutual funds with similar investment objectives. The Board discussed the performance with representatives from the Advisor and concluded that the investment performance of each of the Fund’s Series was reasonable based on the Fund’s actual performance and comparative performance, especially performance over the current market cycle. |
| · | The Board considered the costs of the Advisor’s services and the profits of the Advisor as they relate to the Advisor’s services to the Fund under the Agreement. In reviewing the Advisor’s costs and profits, the Board discussed the Advisor’s revenues generated from the Fund (on both an actual and adjusted basis) and its expenses associated with providing the services under the Agreement. In addition, the Board reviewed the Advisor’s expenses associated with Fund activities outside of the Agreement (such as expense reimbursements pursuant to expense caps and payments made by the Advisor to third party platforms on which shares of the Fund are available for purchase). It was noted by representatives of the Advisor that 6 of the 18 active Series of the Fund are currently experiencing expenses above the capped expense ratios. After discussing the above costs and profits, the Board concluded that the Advisor’s profitability relating to its services provided under the Agreement is reasonable. |
| · | The Board considered the fees and expenses of the various Series of the Fund. The Advisor presented the advisory fees and total expenses for each Series, including the advisory fee adjusted for any expense waivers or reimbursements (either contractual or voluntary) paid by the Advisor. The advisory fees and expense ratios of each Series were compared to an average (on both a mean and median basis) of similar funds as disclosed on the Morningstar database. Representatives of the Advisor discussed with the Board the levels of its advisory fee for each Series of the Fund and as compared to the median and mean advisory fees for similar funds as listed on Morningstar. Expense ratios for every Series, except the High Yield Bond Series, are currently below the median and mean for similar funds as listed on Morningstar. Based on their review of the information provided, the Board concluded that the fees and expenses of each Series of the Fund were reasonable on a comparative basis. |
23
Renewal of Investment Advisory Agreement (unaudited)
| · | The Board also considered the other benefits the Advisor derives from its relationship with the Fund. Such other benefits include certain research products provided by soft dollars. Given the level of soft dollar transactions involving the Fund, the Board concluded that these additional benefits to the Advisor were reasonable. |
| · | In addition to the factors described above, the Board considered the Advisor’s personnel, the Advisor’s investment strategies, the Advisor’s policies and procedures relating to compliance with personal securities transactions, and the Advisor’s reputation, expertise and resources in domestic and foreign financial markets. The Board concluded that these factors support the conclusion that the Advisor performs its services in a reasonable manner. |
| · | The Board did not consider economies of scale at this time because of the multiple uses of the Fund (for the Advisor’s discretionary investment account clients in addition to direct investors), the current profitability of the Advisor’s services to the Fund under the Agreement, and the overall size of the Fund complex. |
Based on the Board’s conclusions regarding the factors described above, the Board, including a majority of Directors that are “not interested” as defined in the Investment Company Act of 1940, approved the renewal of the Agreement for another year. In the course of their deliberations, the Directors did not identify any particular information that was all important or controlling.
24
Directors’ and Officers’ Information (unaudited)
The Statement of Additional Information provides additional information about the Fund's directors and officers and can be obtained without charge by calling 1-800-466-3863, at www.manningnapieradvisors.com, or on the EDGAR Database on the SEC Internet web site (http:\\www.sec.gov). The following chart shows certain information about the Fund's officers and directors, including their principal occupations during the last five years. Unless specific dates are provided, the individuals have held the listed positions for longer than five years.
INTERESTED DIRECTOR/OFFICER | |
| Name: | B. Reuben Auspitz* |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 59 |
| Current Position(s) Held with Fund: | Principal Executive Officer, President, Chairman & Director |
Term of Office1& Length of Time Served: | Indefinite - Director since 1984; Vice President 1984 - 2003; President since 2004; |
| | Principal Executive Officer since 2002 |
| Principal Occupation(s) During Past 5 Years: | Executive Vice President; Co-Executive Director; Executive Group Member**; Chief |
| | Compliance Officer since 2004 - Manning & Napier Advisors, Inc. President; Director - |
| | Manning & Napier Investor Services, Inc. Holds or has held one or more of |
| | the following titles for various subsidiaries and affiliates: President, Vice President, |
| | Director, Chairman, Treasurer, Chief Compliance Officer or Member. |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| | |
INDEPENDENT DIRECTORS | |
| Name: | Stephen B. Ashley |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 66 |
| Current Position(s) Held with Fund: | Director, Audit Committee Member, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1996 |
| Principal Occupation(s) During Past 5 Years: | Chairman, Director, President & Chief Executive Officer, |
| | The Ashley Group (property management and investment) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | Genesee Corp. |
| | The Ashley Group |
| | Fannie Mae |
| | |
| Name: | Peter L. Faber |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 68 |
| Current Position(s) Held with Fund: | Director, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1987 |
| Principal Occupation(s) During Past 5 Years: | Senior Counsel, McDermott, Will & Emery LLP (law firm) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | Partnership for New York City, Inc. |
| | New York Collegium |
| Name: | Harris H. Rusitzky |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 72 |
| Current Position(s) Held with Fund: | Director, Audit Committee Member, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1985 |
| Principal Occupation(s) During Past 5 Years: | President, The Greening Group (business consultants); Partner, The Restaurant Group |
| | (restaurants) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
25
Directors' and Officers' Information (unaudited)
OFFICERS | |
| Name: | Jeffrey S. Coons, Ph.D., CFA |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 43 |
| Current Position(s) Held with Fund: | Vice President |
Term of Office1& Length of Time Served: | Since 2004 |
| Principal Occupation(s) During Past 5 Years: | Co-Director of Research since 2002 & Executive Group Member**, |
| | Manning & Napier Advisors, Inc. Managing Director - Risk Management, Manning & |
| | Napier Advisors, Inc., 1993-2002. Holds one or more of the following titles for various |
| | subsidiaries and affiliates: President, Director, Treasurer or Senior Trust Officer. |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Christine Glavin |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 40 |
| Current Position(s) Held with Fund: | Principal Financial Officer, Chief Financial Officer |
Term of Office1& Length of Time Served: | Principal Financial Officer since 2002; Chief Financial Officer since 2001 |
| Principal Occupation(s) During Past 5 Years: | Fund Accounting Manager, Manning & Napier Advisors, Inc. |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Jodi L. Hedberg |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 39 |
| Current Position(s) Held with Fund: | Corporate Secretary, Chief Compliance Officer, Anti-Money Laundering Compliance |
| | Officer |
Term of Office1& Length of Time Served: | Corporate Secretary since 1997; Chief Compliance Officer since 2004 |
| Principal Occupation(s) During Past 5 Years: | Director of Compliance, Manning & Napier Advisors, Inc. and affiliates; Corporate |
| | Secretary, Manning & Napier Investor Services, Inc. since 2006 |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Alaina V. Metz |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 39 |
| Current Position(s) Held with Fund: | Special Assistant Secretary |
| Term of Office & Length of Time Served: | Indefinite - Since 2002 |
| Principal Occupation(s) During Past 5 Years: | Vice President, BISYS Fund Services Ohio, Inc. (mutual fund servicing company) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
*Interested Director, within the meaning of the Investment Company Act of 1940 by reason of his position with the Fund's investment advisor and distributor. Mr. Auspitz serves as the Executive Vice President and Director, Manning & Napier Advisors, Inc. and President and Director, Manning & Napier Investor Services, Inc., the Fund's distributor.
**The Executive Group performs the duties of the Office of the Chief Executive of Manning & Napier Advisors, Inc.
1The term of office for President, Vice President, Chief Financial Officer, and Corporate Secretary is one year and until their respective successors are chosen and qualified. All other officers' terms are indefinite.
26
Literature Requests (unaudited)
Proxy Voting Policies and Procedures
A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request:
By phone 1-800-466-3863
On the Securities and Exchange
Commission’s (SEC) web site http://www.sec.gov
Proxy Voting Record
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30th is available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
Quarterly Portfolio Holdings
The Series’ complete schedule of portfolio holdings for the 1st and 3rd quarters of each fiscal year are provided on Form N-Q, and are available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
The Series’ Form N-Q may be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
Prospectus and Statement of Additional Information (SAI)
The prospectus and SAI provide additional information about each Series, including charges, expenses and risks. These documents are available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
On the Advisor’s web site http://www.manningnapieradvisors.com
Additional information available at www.manningnapieradvisors.com
| 1. | Fund Holdings - Month-End |
| 2. | Fund Holdings - Quarter-End |
| 3. | Shareholder Report - Annual |
| 4. | Shareholder Report - Semi-Annual |
27
Manning & Napier Fund, Inc.
Ohio Tax Exempt Series
Annual Report
December 31, 2006
Management Discussion and Analysis (unaudited)
Dear Shareholders:
Interest rates rise and interest rates fall; when they do, so too do the market prices of fixed income securities. The one difference is that when interest rates rise, prices fall and vice versa. Over the long-term, however, the total returns generated by most municipal bonds track their coupons, or more specifically, their yields to maturity. What was interesting about 2006 is that this long-term tendency presented itself over a much shorter time period. Municipal bond investors essentially earned their coupons in 2006; total returns tracked coupons pretty closely with short-term municipal yields modestly higher (about 30 basis points (i.e., 0.30%)) at the end of the year compared to where they started the year, and long-term municipal yields modestly lower. The Ohio Tax Exempt Series turned in a performance that was slightly less than that of the market.
While they are not explicitly tied to the U.S. Treasury markets, like all non-government sectors of the fixed income markets, municipal bonds take their cue from what happens there. In 2006, short-term U.S. Treasury yields moved sharply higher, almost a full percentage point, as the Federal Reserve (the “Fed”) pushed its Fed Funds target up from 4.25% to 5.25% during the first six months of the year. The Fed Funds target remained unchanged during the second half of 2006. Short- to intermediate-term yields moved slightly higher during the year, as did long-term U.S. Treasury yields. This differed from what happened in the municipal bond market.
During the first quarter of the year, the Fed raised the Fed Funds target because it was concerned about the inflationary effects of a run-up in commodity prices. Crude oil traded very close to $70 a barrel and the Commodity Research Bureau Raw Industrials Index rose more than 5% during the first three months of the year. The Fed was also concerned about the inflationary effects of the increases in “resource utilization,” primarily in the labor markets. The actions of the Fed and the economic environment pushed rates higher across the entire yield curve.
During the second quarter of the year, a modest acceleration in the rate of inflation showed up in the inflation measures themselves. At the end of May, the Consumer Price Index (CPI) was growing at a year over year rate of 4.1%, a bit faster than its 3.4% growth rate in December of 2005. Looking at the same measure in a slightly different fashion, the annualized growth rate through the first five months of 2006 was 5.1%. Through May, the CPI was only rising at an annualized rate of 3.6%.
Given the volatility associated with the food and energy components of the inflation indices, the “core” rate of inflation, the index excluding its food and energy components, has become increasingly important. During the second quarter, the core rate of inflation had also accelerated; it was up 2.4% year over year in May, slightly higher than its December reading of 2.2%. Unfortunately, the annualized readings were more troubling. Through the first five months of 2005, the core CPI measure annualized at a 2.4% rate; through the first five months of 2006, it was annualizing at 3.1%. Once again, interest rates moved higher across the entire yield curve.
Things began to change during the third quarter of the year with emerging signs that inflation pressures were receding. The Fed responded by leaving the Fed Funds target unchanged at both of its meetings during the quarter. The Fed was quite straightforward when it mentioned in its August press release that “inflation pressures seem likely to moderate over time, reflecting contained inflation expectations and the cumulative effects of monetary policy.” As for economic evidence of “the cumulative effects of monetary policy,” they were fairly widespread. Various indices related to economic growth rolled over during the quarter, and the Fed’s prior policy actions definitely played a role in the universally weak readings associated with the housing market. With the Fed on hold, short-term interest rates held steady, and intermediate- and longer-term interest rates moved sharply lower.
The Fed stayed on the same policy path during the fourth quarter, deciding at both of its meetings to leave the Fed Funds target unchanged. The reasoning remained the same, “inflation pressures seem likely to moderate over time.” However as the quarter progressed, there were subtle signs that the economic environment was holding just fine. The number of new jobs created each month grew throughout the quarter. The improving labor market, along with lower oil prices, translated into higher levels of consumer confidence. And as consumer spirits rose, same store sales picked back up after a miserable year over year reading in October. Short-term interest rates remained stable with the Fed on hold; after declining early in the quarter, longer-term interest rates retraced some of those gains as the year came to a close.
1
Management Discussion and Analysis (unaudited)
While the short-end of the municipal market tracked what was occurring in the U.S. Treasury market, longer-term municipals did not follow suit for a couple of reasons. First, tax receipts at the municipal level came in quite strong, causing municipal credit quality to improve, and the effect of that was most noticeable on the longer end of the municipal yield curve. Longer-term municipals also benefited from solid demand at the individual investor level.
As for the actual performance of the Ohio Tax Exempt Series in 2006, it came in at 3.19%. That was slightly behind the Merrill Lynch 1-12 Year Municipal Bond Index, which returned 3.77% in 2006. The Series’ relative underperformance can be attributed to a concentration of higher quality, but lower yielding securities relative to the benchmark.
Over the longer-term interest rates and spreads will fluctuate; sometimes the cyclical and/or policy pressures will push them both higher, sometimes they will push both lower, and other times, like last year, all of the various factors will be a bit of a wash. The key to investment success requires the investor to focus on the secular (non-cyclical) trends and the fundamental forces that drive each, an approach that we apply to all of our investment decisions
We appreciate your business and wish you all the very best in the coming year.
Sincerely,
Manning & Napier Advisors, Inc.
2
Performance Update as of December 31, 2006 (unaudited)
| | Average Annual Total Returns |
| | As of December 31, 2006 |
| | One | Five | Ten | Since |
| | Year | Year | Year | Inception1 |
Manning & Napier Fund, Inc. - Ohio Tax Exempt Series2 | 3.19% | 4.34% | 4.55% | 4.52% |
| | | | | |
Merrill Lynch 1-12 Municipal Bond Index3 | 3.77% | 4.83% | 5.26% | 5.21% |
The following graph compares the value of a $10,000 investment in the Manning & Napier Fund, Inc. - Ohio Tax Exempt Series for the ten years ended December 31, 2006 to the Merrill Lynch 1-12 Year Municipal Bond Index.
Data for line graph to follow:
| | Manning & Napier Fund, Inc. | Merrill Lynch |
| Date | Ohio Tax Exempt Series2 | 1-12 Year Municipal Bond Index |
| 12/31/96 | 10,000 | 10,000 |
| 12/31/97 | 10,791 | 10,769 |
| 12/31/98 | 11,368 | 11,444 |
| 12/31/99 | 10,792 | 11,443 |
| 12/31/00 | 12,109 | 12,546 |
| 12/31/01 | 12,615 | 13,192 |
| 12/31/02 | 13,652 | 14,574 |
| 12/31/03 | 14,229 | 15,276 |
| 12/31/04 | 14,696 | 15,802 |
| 12/31/05 | 15,115 | 16,097 |
| 12/31/06 | 15,597 | 16,703 |
1Performance numbers for the Series and Index are calculated from February 14, 1994, the Series' inception date.
2The Series' performance does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. The Series' performance is historical and may not be indicative of future results.
3The Merrill Lynch 1-12 Year Municipal Bond Index is an unmanaged, market weighted index comprised of investment grade, fixed rate, coupon bearing municipal bonds with maturities greater than one year but less than twelve years. The Index returns assume reinvestment of coupons and, unlike Series returns, do not reflect any fees or expenses.
3
Shareholder Expense Example (unaudited)
As a shareholder of the Series, you may incur two types of costs: (1) transaction costs, including potential wire charges on redemptions and (2) ongoing costs, including management fees and other Series expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Series and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (July 1, 2006 to December 31, 2006).
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Series’ actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Series’ actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid during the period. You may use this information to compare the ongoing costs of investing in the Series and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transaction costs, such as potential wire charges on redemptions. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transaction costs were included, your costs would have been higher.
| | Beginning | Ending | Expenses Paid |
| | Account Value | Account Value | During Period* |
| | 7/1/06 | 12/31/06 | 7/1/06-12/31/06 |
| Actual | $1,000.00 | $1,037.00 | $4.36 |
| Hypothetical | | | |
| (5% return before expenses) | $1,000.00 | $1,020.92 | $4.33 |
*Expenses are equal to the Series’ annualized expense ratio (for the six-month period) of 0.85%, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). Expenses are based on the most recent fiscal half year; therefore, the expense ratio stated above may differ from the expense ratio stated in the financial highlights, which is based on one-year data. The Series’ total return would have been lower had certain expenses not been waived during the period.
4
Portfolio Composition as of December 31, 2006 (unaudited)
Data for pie chart to follow:
Bond Types1
| General Obligation Bonds | 88.5% |
| Revenue Bonds | 8.4% |
| Cash, short-term investments, and other assets, less liabilities | 3.1% |
1As a percentage of net assets.
Quality Ratings2,3
| Aaa | 88.2% |
| Aa | 8.7% |
| Unrated investments, such as cash, short-term investments, and other assets, less liabilities | 3.1% |
2As a percentage of net assets.
3Based on ratings from Moody's, or the S&P equivalent. The Series may use different ratings provided by other rating agencies for purposes of determining compliance with the Series' investment policies.
5
Investment Portfolio - December 31, 2006
| | Credit | | |
| | Rating1 | Principal | Value |
| | (unaudited) | Amount | (Note 2) |
OHIO MUNICIPAL SECURITIES - 96.9% | | | |
| | | | |
| Amherst Exempt Village School District, G.O. Bond, FGIC, 4.75%, 12/1/2010 | Aaa | $200,000 | $208,040 |
| Avon Lake City School District, Prerefunded Balance, G.O. Bond, FGIC, 5.75%, 12/1/2014 | Aaa | 500,000 | 538,705 |
| Bedford Heights, G.O. Bond, Series A, AMBAC, 5.65%, 12/1/2014 | Aaa | 40,000 | 42,525 |
| Big Walnut Local School District, Delaware County, School Facilities Construction & Impt., G.O. Bond, FSA, 4.50%, 12/1/2029 | Aaa | 200,000 | 200,788 |
| Canal Winchester Local School District, G.O. Bond, MBIA, 5.00%, 12/1/2025 | Aaa | 355,000 | 377,550 |
| Chagrin Falls Exempt Village School District, Prerefunded Balance, G.O. Bond, 5.55%, 12/1/2022 | Aa3 | 100,000 | 102,733 |
| Chillicothe Water System, Revenue Bond, MBIA, 4.00%, 12/1/2009 | Aaa | 125,000 | 126,337 |
| Cincinnati, Various Purposes, G.O. Bond, Series A, 5.00%, 12/1/2011 | Aa1 | 200,000 | 211,874 |
| Cleveland Heights & University Heights County School District, Library Impt., G.O. Bond, 5.125%, 12/1/2026 | Aa3 | 200,000 | 211,754 |
| Cleveland Waterworks, Prerefunded Balance, Revenue Bond, Series I, FSA, 5.00%, 1/1/2028 | Aaa | 110,000 | 112,623 |
| Cleveland Waterworks, Unrefunded Balance, Revenue Bond, Series I, FSA, 5.00%, 1/1/2028 | Aaa | 155,000 | 158,002 |
| Columbus, Limited Tax, G.O. Bond, Series 2, 5.00%, 7/1/2017 | Aaa | 250,000 | 269,430 |
| Columbus City School District, School Facilities Construction & Impt., G.O. Bond, FSA, 4.25%, 12/1/2032 | Aaa | 500,000 | 484,695 |
| Delaware City School District, Prerefunded Balance, G.O. Bond, FSA, 5.00%, 12/1/2025 | Aaa | 200,000 | 207,206 |
| Delaware City School District, Prerefunded Balance, G.O. Bond, FSA, 5.00%, 12/1/2025 | Aaa | 100,000 | 103,603 |
| Dublin City School District, School Facilities Construction & Impt., G.O. Bond, 5.375%, 12/1/2017 | Aa1 | 350,000 | 378,591 |
| Eaton City School District, Prerefunded Balance, G.O. Bond, FGIC, 5.00%, 12/1/2029 | Aaa | 200,000 | 215,762 |
| Eaton Community City Schools, School Impt., G.O. Bond, FGIC, 4.125%, 12/1/2026 | Aaa | 500,000 | 479,940 |
| Erie County, G.O. Bond, FGIC, 4.75%, 10/1/2019 | Aaa | 175,000 | 177,460 |
| Euclid, G.O. Bond, MBIA, 4.25%, 12/1/2023 | Aaa | 465,000 | 461,657 |
| Fairbanks Local School District, School Facilities Construction & Impt., G.O. Bond, FSA, 4.50%, 12/1/2028 | Aaa | 400,000 | 401,820 |
| Fairfield County, Building Impt., G.O. Bond, 5.00%, 12/1/2018 | Aa3 | 250,000 | 262,657 |
| Fairview Park City School District, School Impt., G.O. Bond, MBIA, 5.00%, 12/1/2029 | Aaa | 315,000 | 334,549 |
| Field Local School District, School Facilities Construction & Impt., G.O. Bond, AMBAC, 5.00%, 12/1/2026 | Aaa | 200,000 | 213,144 |
The accompanying notes are an integral part of the financial statements.
6
Investment Portfolio - December 31, 2006
| | Credit | | |
| | Rating1 | Principal | Value |
| | (unaudited) | Amount | (Note 2) |
OHIO MUNICIPAL SECURITIES (continued) | | | |
| | | | |
| Garfield Heights City School District, School Impt., Prerefunded Balance, G.O. Bond, MBIA, 5.00%, 12/15/2026 | Aaa | $250,000 | $265,067 |
| Genoa Area Local School District, Prerefunded Balance, G.O. Bond, FGIC, 5.40%, 12/1/2027 | Aaa | 150,000 | 161,037 |
| Greater Cleveland Regional Transit Authority, Capital Impts., G.O. Bond, FGIC, 4.125%, 12/1/2023 | Aaa | 450,000 | 435,325 |
| Greene County Sewer System, Governmental Enterprise, Prerefunded Balance, Revenue Bond, AMBAC, 5.625%, 12/1/2025 | Aaa | 235,000 | 253,760 |
| Hancock County, Various Purposes, G.O. Bond, MBIA, 4.00%, 12/1/2016 | Aaa | 200,000 | 202,272 |
| Highland Local School District, School Impt., G.O. Bond, FSA, 5.00%, 12/1/2009 | Aaa | 190,000 | 197,150 |
| Ironton City School District, G.O. Bond, MBIA, 4.25%, 12/1/2028 | Aaa | 500,000 | 487,445 |
| Jackson Local School District, Stark & Summit Counties, G.O. Bond, FGIC, 3.50%, 12/1/2011 | Aaa | 210,000 | 208,215 |
| Jackson Local School District, Stark & Summit Counties, Construction & Impt., G.O. Bond, FGIC, 5.00%, 12/1/2030 | Aaa | 200,000 | 211,150 |
| Lakewood, Water System, Revenue Bond, AMBAC, 4.50%, 7/1/2028 | Aaa | 500,000 | 502,305 |
| Licking County Joint Vocational School District, School Facilities Construction & Impt., G.O. Bond, MBIA, 5.00%, 12/1/2007 | Aaa | 300,000 | 303,795 |
| Licking Heights Local School District, School Facilities Construction & Impt., G.O. Bond, Series A, MBIA, 5.00%, 12/1/2022 | Aaa | 250,000 | 267,535 |
| Lorain City School District, Classroom Facilities Impt., G.O. Bond, MBIA, 4.75%, 12/1/2025 | Aaa | 400,000 | 414,544 |
| Loveland City School District, Prerefunded Balance, G.O. Bond, Series A, MBIA, 5.00%, 12/1/2024 | Aaa | 200,000 | 209,554 |
| Mansfield City School District, Various Purposes, Prerefunded Balance, G.O. Bond, MBIA, 5.75%, 12/1/2022 | Aaa | 250,000 | 266,655 |
| Marysville Exempt Village School District, G.O. Bond, FSA, 5.00%, 12/1/2023 | Aaa | 500,000 | 536,030 |
| Maumee, G.O. Bond, MBIA, 4.125%, 12/1/2018 | Aaa | 375,000 | 377,107 |
| Maumee City School District, School Facilities Construction & Impt., G.O. Bond, FSA, 4.60%, 12/1/2031 | Aaa | 260,000 | 262,262 |
| Medina City School District, G.O. Bond, FGIC, 5.00%, 12/1/2018 | Aaa | 150,000 | 153,275 |
| Minster Local School District, G.O. Bond, FSA, 4.25%, 12/1/2018 | AAA2 | 250,000 | 253,015 |
| Mississinawa Valley Local School District, Classroom Facilities, G.O. Bond, FSA, 5.75%, 12/1/2022 | Aaa | 205,000 | 224,389 |
The accompanying notes are an integral part of the financial statements.
7
Investment Portfolio - December 31, 2006
| | Credit | | |
| | Rating1 | Principal | Value |
| | (unaudited) | Amount | (Note 2) |
OHIO MUNICIPAL SECURITIES (continued) | | | |
| | | | |
| New Albany Plain Local School District, Prerefunded Balance, G.O. Bond, FGIC, 5.00%, 12/1/2025 | Aaa | $45,000 | $47,940 |
| New Albany Plain Local School District, Unrefunded Balance, G.O. Bond, FGIC, 5.00%, 12/1/2025 | Aaa | 270,000 | 283,573 |
| New Albany Plain Local School District, Prerefunded Balance, G.O. Bond, FGIC, 5.00%, 12/1/2029 | Aaa | 95,000 | 101,206 |
| New Albany Plain Local School District, Unrefunded Balance, G.O. Bond, FGIC, 5.00%, 12/1/2029 | Aaa | 130,000 | 136,148 |
| North Olmsted, Prerefunded Balance, G.O. Bond, AMBAC, 5.00%, 12/1/2016 | Aaa | 125,000 | 127,799 |
| Ohio State, Common Schools Capital Facilities, Prerefunded Balance, G.O. Bond, Series A, 4.75%, 6/15/2020 | Aa1 | 250,000 | 258,780 |
| Ohio State, Infrastructure Impt., Prerefunded Balance, G.O. Bond, 5.20%, 8/1/2010 | Aa1 | 50,000 | 50,953 |
| Ohio State, Infrastructure Impt., G.O. Bond, Series A, 5.00%, 3/1/2017 | Aa1 | 250,000 | 271,968 |
| Ohio State Water Development Authority, Pure Water, Revenue Bond, Series I, AMBAC, 6.00%, 12/1/2016 | Aaa | 40,000 | 44,647 |
| Ohio State Water Development Authority, Fresh Water, Prerefunded Balance, Revenue Bond, FSA, 5.125%, 12/1/2023 | Aaa | 300,000 | 309,342 |
| Ohio State Water Development Authority, Pollution Control, Revenue Bond, 5.25%, 12/1/2015 | Aaa | 200,000 | 222,436 |
| Ontario Local School District, Prerefunded Balance, G.O. Bond, FSA, 5.00%, 12/1/2023 | Aaa | 350,000 | 362,611 |
| Orange City School District, G.O. Bond, 5.00%, 12/1/2023 | Aaa | 305,000 | 314,852 |
| Painesville City School District, School Impt., G.O. Bond, FGIC, 4.50%, 12/1/2025 | Aaa | 170,000 | 171,802 |
| Pickerington Local School District, G.O. Bond, MBIA, 4.30%, 12/1/2024 | Aaa | 300,000 | 297,546 |
| Plain Local School District, G.O. Bond, FGIC, 5.00%, 12/1/2030 | Aaa | 140,000 | 146,707 |
| Sidney City School District, School Impt., G.O. Bond, Series B, FGIC, 5.10%, 12/1/2019 | Aaa | 150,000 | 159,615 |
| South-Western City School District, Franklin & Pickway County, G.O. Bond, FSA, 4.25%, 12/1/2026 | Aaa | 600,000 | 587,340 |
| South-Western City School District, Franklin & Pickway County, Prerefunded Balance, G.O. Bond, AMBAC, 4.75%, 12/1/2026 | Aaa | 175,000 | 177,520 |
| Springboro Community City School District, School Impt., G.O. Bond, MBIA, 5.00%, 12/1/2025 | Aaa | 280,000 | 296,713 |
| Tallmadge City School District, School Facilities, G.O. Bond, FSA, 5.00%, 12/1/2031 | AAA2 | 200,000 | 212,266 |
| Tecumseh Local School District, School Impt., G.O. Bond, FGIC, 4.75%, 12/1/2027 | Aaa | 195,000 | 201,626 |
The accompanying notes are an integral part of the financial statements.
8
Investment Portfolio - December 31, 2006
| | Credit | Principal | |
| | Rating1 | Amount/ | Value |
| | (unaudited) | Shares | (Note 2) |
OHIO MUNICIPAL SECURITIES (continued) | | | |
| | | | |
| Trotwood-Madison City School District, School Impt., G.O. Bond, FSA, 4.25%, 12/1/2022 | Aaa | $250,000 | $248,848 |
| Troy City School District, School Impt., G.O. Bond, FSA, 4.00%, 12/1/2014 | Aaa | 250,000 | 254,105 |
| Van Buren Local School District, School Facilities Construction & Impt., G.O. Bond, FSA, 5.25%, 12/1/2016 | Aaa | 300,000 | 320,325 |
| Van Wert City School District, School Impt., G.O. Bond, FGIC, 5.00%, 12/1/2020 | Aaa | 500,000 | 529,905 |
| Vandalia, G.O. Bond, AMBAC, 5.00%, 12/1/2015 | Aaa | 235,000 | 254,329 |
| Washington Court House City School District, School Impt., G.O. Bond, FGIC, 5.00%, 12/1/2029 | Aaa | 500,000 | 532,555 |
| Westerville City School District, Prerefunded Balance, G.O. Bond, MBIA, 5.00%, 12/1/2027 | Aaa | 200,000 | 210,846 |
| Wood County, G.O. Bond, 5.40%, 12/1/2013 | Aa3 | 40,000 | 40,047 |
| Wyoming City School District, Prerefunded Balance, G.O. Bond, Series B, FGIC, 5.15%, 12/1/2027 | Aaa | 300,000 | 311,637 |
| | | | |
TOTAL OHIO MUNICIPAL SECURITIES | | | |
| (Identified Cost $19,593,229) | | | 19,959,319 |
| | | | |
SHORT-TERM INVESTMENTS - 2.8% | | | |
| Dreyfus Municipal Reserves - Class R | | | |
| (Identified Cost $583,002) | | 583,002 | 583,002 |
| | | | |
TOTAL INVESTMENTS - 99.7% | | | |
| (Identified Cost $20,176,231) | | | 20,542,321 |
| | | | |
OTHER ASSETS, LESS LIABILITIES - 0.3% | | | 69,351 |
| | | | |
NET ASSETS - 100% | | | $20,611,672 |
KEY:
G.O. Bond - General Obligation Bond
Impt. - Improvement
Scheduled principal and interest payments are guaranteed by:
AMBAC (AMBAC Assurance Corp.)
FGIC (Financial Guaranty Insurance Co.)
FSA (Financial Security Assurance)
MBIA (MBIA, Inc.)
The insurance does not guarantee the market value of the municipal bonds.
1Credit ratings from Moody’s (unaudited).
2Credit ratings from S&P (unaudited).
The Series' portfolio holds, as a percentage of net assets, greater than 10% in bonds insured by the following companies:
FSA - 26.4%; FGIC - 26.3%; MBIA - 23.8%.
The accompanying notes are an integral part of the financial statements.
9
Statement of Assets and Liabilities
December 31, 2006
ASSETS: | |
| | |
| Investments, at value (identified cost $20,176,231) (Note 2) | $20,542,321 |
| Interest receivable | 101,882 |
| Dividends receivable | 1,941 |
| | |
| TOTAL ASSETS | 20,646,144 |
| | |
LIABILITIES: | |
| | |
| Accrued management fees (Note 3) | 7,128 |
| Accrued fund accounting and transfer agent fees (Note 3) | 2,328 |
| Accrued Chief Compliance Officer service fees (Note 3) | 429 |
| Accrued directors' fees (Note 3) | 194 |
| Audit fees payable | 23,763 |
| Other payables and accrued expenses | 630 |
| | |
| TOTAL LIABILITIES | 34,472 |
| | |
TOTAL NET ASSETS | $20,611,672 |
| | |
NET ASSETS CONSIST OF: | |
| | |
| Capital stock | $19,699 |
| Additional paid-in-capital | 20,109,952 |
| Undistributed net investment income | 116,973 |
| Accumulated net realized loss on investments | (1,042) |
| Net unrealized appreciation on investments | 366,090 |
| | |
TOTAL NET ASSETS | $20,611,672 |
| | |
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE ($20,611,672/1,969,912 shares) | $10.46 |
The accompanying notes are an integral part of the financial statements.
10
For the Year Ended December 31, 2006
INVESTMENT INCOME: | |
| | |
| Interest | $822,320 |
| Dividends | 13,587 |
| | |
| Total Investment Income | 835,907 |
| | |
EXPENSES: | |
| | |
| Management fees (Note 3) | 89,637 |
| Fund accounting and transfer agent fees (Note 3) | 27,623 |
| Directors' fees (Note 3) | 7,100 |
| Chief Compliance Officer service fees (Note 3) | 6,195 |
| Audit fees | 26,200 |
| Custodian fees | 1,500 |
| Miscellaneous | 7,546 |
| | |
| Total Expenses | 165,801 |
| Less reduction of expenses (Note 3) | (13,310) |
| | |
| Net Expenses | 152,491 |
| | |
| NET INVESTMENT INCOME | 683,416 |
| | |
REALIZED AND UNREALIZED LOSS ON INVESTMENTS: | |
| | |
| Net realized loss on investments | (1,042) |
| Net change in unrealized appreciation on investments | (117,339) |
| | |
| NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS | (118,381) |
| | |
| NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS | $565,035 |
The accompanying notes are an integral part of the financial statements.
11
Statements of Changes in Net Assets
| | For the | For the |
| | Year Ended | Year Ended |
| | 12/31/06 | 12/31/05 |
| | | |
INCREASE (DECREASE) IN NET ASSETS: | | |
| | | |
OPERATIONS: | | |
| | | |
| Net investment income | $683,416 | $555,086 |
| Net realized gain (loss) on investments | (1,042) | 15,686 |
| Net change in unrealized appreciation on investments | (117,339) | (145,892) |
| | | |
| Net increase from operations | 565,035 | 424,880 |
| | | |
DISTRIBUTIONS TO SHAREHOLDERS (Note 8): | | |
| | | |
| From net investment income | (666,971) | (519,425) |
| From net realized gain on investments | (10,640) | (10,188) |
| | | |
| Total distributions to shareholders | (677,611) | (529,613) |
| | | |
CAPITAL STOCK ISSUED AND REPURCHASED: | | |
| | | |
| Net increase from capital share transactions (Note 5) | 4,735,810 | 1,973,214 |
| | | |
| Net increase in net assets | 4,623,234 | 1,868,481 |
| | | |
NET ASSETS: | | |
| | | |
| Beginning of year | 15,988,438 | 14,119,957 |
| | | |
| | | |
End of year (including undistributed net investment income of $116,973 and $100,444, respectively) | $20,611,672 | $15,988,438 |
The accompanying notes are an integral part of the financial statements.
12
| | For the Years Ended |
| | 12/31/06 | 12/31/05 | 12/31/04 | 12/31/03 | 12/31/02 |
| | | | | | |
Per share data (for a share outstanding | | | | | |
throughout each year): | | | | | |
| | | | | | |
Net asset value - Beginning of year | $10.52 | $10.59 | $10.75 | $10.74 | $10.31 |
| | | | | | |
| Income (loss) from investment operations: | | | | | |
| Net investment income | 0.38 | 0.38 | 0.38 | 0.42 | 0.41 |
| Net realized and unrealized gain (loss) on investments | (0.05) | (0.08) | (0.04) | 0.03 | 0.43 |
| | | | | | |
| Total from investment operations | 0.33 | 0.30 | 0.34 | 0.45 | 0.84 |
| | | | | | |
| Less distributions to shareholders: | | | | | |
| From net investment income | (0.38) | (0.36) | (0.49) | (0.39) | (0.40) |
| From net realized gain on investments | (0.01) | (0.01) | (0.01) | (0.05) | (0.01) |
| | | | | | |
| Total distributions to shareholders | (0.39) | (0.37) | (0.50) | (0.44) | (0.41) |
| | | | | | |
Net asset value - End of year | $10.46 | $10.52 | $10.59 | $10.75 | $10.74 |
| | | | | | |
Total return1 | 3.19% | 2.85% | 3.28% | 4.23% | 8.22% |
| | | | | | |
Ratios (to average net assets)/Supplemental Data: | | | | | |
| Expenses* | 0.85% | 0.85% | 0.85% | 0.85% | 0.85% |
| Net investment income | 3.81% | 3.65% | 3.64% | 3.91% | 4.09% |
| | | | | | |
| Portfolio turnover | 9% | 9% | 7% | 14% | 8% |
| | | | | | |
Net assets - End of year (000's omitted) | $20,612 | $15,988 | $14,120 | $12,092 | $11,785 |
*The investment advisor did not impose all or a portion of its management fee and in some years paid a portion of the Series' expenses. If these expenses had been incurred by the Series, the expense ratio (to average net assets) would have been increased as follows:
| 0.07% | 0.15% | 0.20% | 0.59% | 0.68% |
1Represents aggregate total return for the year indicated, and assumes reinvestment of all distributions. Total return would have been lower had certain expenses not been waived or reimbursed during the year.
The accompanying notes are an integral part of the financial statements.
13
Notes to Financial Statements
1. ORGANIZATION
Ohio Tax Exempt Series (the "Series") is a no-load diversified series of Manning & Napier Fund, Inc. (the “Fund”), formerly Exeter Fund, Inc. The Fund is organized in Maryland and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company.
The Series' investment objective is to provide as high a level of current income exempt from federal income tax and Ohio State personal income tax as the Advisor believes is consistent with the preservation of capital.
The Fund’s Advisor is Manning & Napier Advisors, Inc. (the “Advisor”). Shares of the Series are offered to investors, clients and employees of the Advisor and its affiliates. The total authorized capital stock of the Fund consists of 1.7 billion shares of common stock each having a par value of $0.01. As of December 31, 2006, 1.16 billion shares have been designated in total among 21 series, of which 50 million have been designated as Ohio Tax Exempt Series Class A common stock.
2. SIGNIFICANT ACCOUNTING POLICIES
Security Valuation
Municipal securities will normally be valued on the basis of market valuations provided by an independent pricing service (the “Service”). The Service utilizes the latest price quotations and a matrix system (which considers such factors as security prices of similar securities, yields, maturities and ratings). The Service has been approved by the Fund’s Board of Directors (the “Board”).
Securities for which representative valuations or prices are not available from the Fund's pricing service may be valued at fair value as determined in good faith by the Advisor under procedures approved by and under the general supervision and responsibility of the Fund’s Board.
Short-term investments that mature in sixty days or less are valued at amortized cost, which approximates market value. Investments in open-end investment companies are valued at their net asset value per share on valuation date.
Security Transactions, Investment Income and Expenses
Security transactions are accounted for on trade date. Interest income, including amortization of premium and accretion of discounts using the effective interest method, is earned from settlement date and accrued daily. Dividend income and expenses are recorded on an accrual basis.
Most expenses of the Fund can be attributed to a specific series. Expenses which cannot be directly attributed are apportioned among the series in the Fund in such a manner as deemed equitable by the Fund's Board, taking into consideration, among other things, the nature and type of expense.
The Series uses the identified cost method for determining realized gain or loss on investments for both financial statement and federal income tax reporting purposes.
Federal Taxes
The Series' policy is to comply with the provisions of the Internal Revenue Code applicable to regulated investment companies. The Series is not subject to federal income or excise tax to the extent that the Series distributes to shareholders each year its taxable income, including any net realized gains on investments, in accordance with requirements of the Internal Revenue Code.
14
Notes to Financial Statements
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Federal Taxes (continued)
Accordingly, no provision for federal income tax or excise tax has been made in the financial statements.
Distributions of Income and Gains
Distributions to shareholders of net investment income are made quarterly. Distributions of net realized gains are made annually. An additional distribution may be necessary to avoid taxation of the Series. Distributions are recorded on the ex-dividend date.
Indemnifications
The Fund’s organizational documents provide former and current directors and officers with a limited indemnification against liabilities arising in connection with the performance of their duties to the Fund. In the normal course of business, the Fund may also enter into contracts that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown as this would be dependent on future claims that may be made against the Fund. The risk of material loss from such claims is considered remote.
Other
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
3. TRANSACTIONS WITH AFFILIATES
The Fund has an Investment Advisory Agreement (the “Agreement”) with the Advisor, for which the Series pays a fee, computed daily and payable monthly, at an annual rate of 0.50% of the Series’ average daily net assets.
Under the Agreement, personnel of the Advisor provide the Series with advice and assistance in the choice of investments and the execution of securities transactions, and otherwise maintain the Series’ organization. The Advisor also provides the Fund with necessary office space and fund administration and support services. The salaries of all officers of the Fund (except a percentage of the Fund’s Chief Compliance Officer’s salary, which is paid by the Fund, and the Special Assistant Secretary’s salary, which is paid by BISYS Fund Services Ohio, Inc. (“BISYS”)), and of all Directors who are "affiliated persons" of the Fund, or of the Advisor, and all personnel of the Fund, or of the Advisor, performing services relating to research, statistical and investment activities, are paid by the Advisor. Each "non-affiliated" Director receives an annual stipend, which is allocated among all the active series of the Fund. In addition, these Directors also receive a fee per Board meeting attended for each active series of the Fund plus a fee for each committee meeting attended.
The Advisor has contractually agreed, until at least April 30, 2008, to waive its fee and, if necessary, pay other operating expenses of the Series in order to maintain total expenses for the Series at no more than 0.85% of average daily net assets each year. Accordingly, the Advisor waived fees of $13,310 for the year ended December 31, 2006, which is reflected as a reduction of expenses on the Statement of Operations. The Advisor is not eligible to recoup any expenses that have been waived or reimbursed in prior years.
15
Notes to Financial Statements
3. TRANSACTIONS WITH AFFILIATES (continued)
Manning & Napier Investor Services, Inc., a registered broker-dealer affiliate of the Advisor, acts as distributor for the Fund's shares. The services of Manning & Napier Investor Services, Inc. are provided at no additional cost to the Series.
For fund accounting and transfer agent services, through October 31, 2006, the Fund paid the Advisor an annual fee of 0.12% of the Fund’s average daily net assets up to $900 million, 0.09% of the Fund’s average daily net assets between $900 million and $1.5 billion, and 0.05% of the Fund’s average daily net assets over $1.5 billion. Effective November 1, 2006, the fee rates were reduced as follows: 0.11% of the Fund’s average daily net assets up to $900 million, 0.07% of the Fund’s average daily net assets between $900 million and $1.5 billion, and 0.04% of the Fund’s average daily net assets over $1.5 billion. Additionally, certain transaction and account-based fees and out-of-pocket expenses, including charges for reporting relating to the Fund’s compliance program, are charged. Expenses not directly attributable to a series are allocated based on each series’ relative net assets or number of accounts, depending on the expense. The Advisor has an agreement with BISYS under which BISYS serves as sub-accounting services and sub-transfer agent.
4. PURCHASES AND SALES OF SECURITIES
For the year ended December 31, 2006, purchases and sales of securities, other than United States Government securities and short-term securities, were $6,006,480 and $1,653,562, respectively. There were no purchases or sales of United States Government securities.
5. CAPITAL STOCK TRANSACTIONS
Transactions in shares of Ohio Tax Exempt Series were:
| | For the Year | For the Year |
| | Ended 12/31/06 | Ended 12/31/05 |
| | Shares | Amount | Shares | Amount |
| Sold | 537,520 | $5,640,792 | 338,241 | $3,578,039 |
| Reinvested | 64,255 | 671,426 | 49,592 | 521,757 |
| Repurchased | (151,462) | (1,576,408) | (201,117) | (2,126,582) |
| Total | 450,313 | $4,735,810 | 186,716 | $1,973,214 |
Substantially all of the Series’ shares represent investments by fiduciary accounts over which the Advisor has sole investment discretion.
6. FINANCIAL INSTRUMENTS
The Series may trade in financial instruments with off-balance sheet risk in the normal course of its investing activities to assist in managing exposure to various market risks. These financial instruments include written options and futures contracts and may involve, to a varying degree, elements of risk in excess of the amounts recognized for financial statement purposes. No such investments were held by the Series on December 31, 2006.
16
Notes to Financial Statements
7. CONCENTRATION OF CREDIT
The Series primarily invests in debt obligations issued by the State of Ohio and its political subdivisions, agencies and public authorities to obtain funds for various public purposes. The Series is more susceptible to factors adversely affecting issues of Ohio municipal securities than is a municipal bond fund that is not concentrated in these issues to the same extent.
8. FEDERAL INCOME TAX INFORMATION
The amount and characterization of certain income and capital gains to be distributed are determined in accordance with federal income tax regulations, which may differ from accounting principles generally accepted in the United States of America. These differences are primarily due to differing book and tax treatments in the timing of the recognition of net investment income or gains and losses, including market discount. The Series may periodically make reclassifications among its capital accounts to reflect income and gains available for distribution (or available capital loss carryovers) under income tax regulations, without impacting the Series' net asset value. Any such reclassifications are not reflected in the financial highlights.
The tax character of distributions paid were as follows:
| | For the Year | For the Year |
| | Ended 12/31/06 | Ended 12/31/05 |
| | | |
| Ordinary income | $43,306 | $- |
| Tax exempt income | 623,690 | 519,425 |
| Long-term capital gains | 10,615 | 10,188 |
Pursuant to Section 852 of the Internal Revenue Code, as amended, the Series hereby designates the long-term capital gains disclosed above as capital gains for its taxable year ended December 31, 2006. In addition, the Series hereby designates the tax exempt income disclosed above as tax exempt dividends for the year ended December 31, 2006.
At December 31, 2006, the tax basis components of distributable earnings and the net unrealized appreciation based on identified cost for federal income tax purposes were as follows:
| Cost for federal income tax purposes | $20,149,589 |
| | |
| Unrealized appreciation | $474,001 |
| Unrealized depreciation | (81,269) |
| | |
| Net unrealized appreciation | $392,732 |
| Undistributed ordinary income | 83 |
| Undistributed tax exempt income | 90,248 |
| Capital loss carryover | 1,042 |
The capital loss carryover, disclosed above, available to the extent allowed by tax law to offset future net capital gain, if any, will expire on December 31, 2014.
9. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement 109. FIN 48 supplements FASB Statement 109, Accounting for Income Taxes, by defining the confidence level that a tax position must meet in order to be recognized in the
17
Notes to Financial Statements
9. RECENT ACCOUNTING PRONOUNCEMENTS (continued)
financial statements. FIN 48 provides guidance for how a fund should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the fund has taken or expects to take on a tax return. FIN 48 requires that the tax effects of a position be recognized only if it is “more likely than not” to be sustained based solely on its technical merits. Tax positions not deemed to meet the more likely than not threshold would be recorded as a tax benefit or expense in the current year. FIN 48 needs to be implemented no later than the first required financial statement reporting period for its fiscal year beginning after December 15, 2006 and is to be applied to all open tax years as of the effective date. At adoption, the financial statements must be adjusted to reflect only those tax positions that are more likely than not to be sustained as of the adoption date. Management of the Fund is currently evaluating the impact that FIN 48 will have on the Series’ financial statements.
In addition, in September 2006, FASB Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“FAS 157”) was issued, and is effective for fiscal years beginning after November 15, 2007. FAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosure about fair value measurements. The standard does not expand the use of fair value in any new circumstances, but provides clarification on acceptable fair value methods and applications. At this time, management is evaluating the implications of FAS 157, but it is not expected to materially impact the Series’ financial statements.
18
Report of Independent Registered Public Accounting Firm
To the Board of Directors of Manning & Napier Fund, Inc. and Shareholders of Ohio Tax Exempt Series:
In our opinion, the accompanying statement of assets and liabilities, including the investment portfolio (except for credit ratings), and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the Ohio Tax Exempt Series (a series of Manning & Napier Fund, Inc., hereafter referred to as the "Series") at December 31, 2006, and the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Series’ management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2006 by correspondence with the custodian, provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Columbus, Ohio
February 9, 2007
19
Renewal of Investment Advisory Agreement (unaudited)
At the Manning & Napier Fund, Inc. (the “Fund”) Board of Directors’ (the “Board”) annual in-person meeting, held on November 16, 2006, the Investment Advisory Agreement (the “Agreement”) between the Fund and Manning & Napier Advisors, Inc. (the “Advisor”) was reviewed by the Board for renewal. In connection with the decision whether to renew the Agreement, a variety of material was prepared for and reviewed by the Board. In addition, at the meeting of the Board, representatives of the Advisor presented additional oral and written information to help the Board evaluate the Advisor’s performance under the Agreement over the previous year. The Board then deliberated on the renewal of the Agreement in light of the various material provided prior to and at the meeting.
In connection with its review and deliberations, the Board considered the following factors and reached a conclusion with respect to such factors.
| · | The Board considered the services provided by the Advisor under the Agreement including, among others: deciding what securities to purchase and sell for each Series; arranging for the purchase and sale of such securities by placing orders with broker-dealers; administering the affairs of the Fund (including the books and records of the Fund not maintained by third party service providers such as the custodian or sub-transfer agent); arranging for the insurance coverage for the Fund; and supervising the preparation of tax returns, SEC filings (including registration statements) and reports to shareholders for the Fund. The Board discussed the quality of these services with representatives from the Advisor and concluded that the Advisor was performing its services to the Fund required under the Agreement in a reasonable manner. |
| · | The Board considered the investment performance of the various Series of the Fund. The investment performance for each Series was reviewed on a cumulative basis since inception and on a one year basis. In addition, annualized peformance for the following time periods was considered: inception, three year, five year, ten year, and current market cycle. A market cycle includes periods of both rising and falling markets. Returns for established benchmark indices for each Series were provided for each time period. In addition, the Board considered at the meeting (and considers on a quarterly basis) a peer group performance analysis consisting of Morningstar universes of mutual funds with similar investment objectives. The Board discussed the performance with representatives from the Advisor and concluded that the investment performance of each of the Fund’s Series was reasonable based on the Fund’s actual performance and comparative performance, especially performance over the current market cycle. |
| · | The Board considered the costs of the Advisor’s services and the profits of the Advisor as they relate to the Advisor’s services to the Fund under the Agreement. In reviewing the Advisor’s costs and profits, the Board discussed the Advisor’s revenues generated from the Fund (on both an actual and adjusted basis) and its expenses associated with providing the services under the Agreement. In addition, the Board reviewed the Advisor’s expenses associated with Fund activities outside of the Agreement (such as expense reimbursements pursuant to expense caps and payments made by the Advisor to third party platforms on which shares of the Fund are available for purchase). It was noted by representatives of the Advisor that 6 of the 18 active Series of the Fund are currently experiencing expenses above the capped expense ratios. After discussing the above costs and profits, the Board concluded that the Advisor’s profitability relating to its services provided under the Agreement is reasonable. |
| · | The Board considered the fees and expenses of the various Series of the Fund. The Advisor presented the advisory fees and total expenses for each Series, including the advisory fee adjusted for any expense waivers or reimbursements (either contractual or voluntary) paid by the Advisor. The advisory fees and expense ratios of each Series were compared to an average (on both a mean and median basis) of similar funds as disclosed on the Morningstar database. Representatives of the Advisor discussed with the Board the levels of its advisory fee for each Series of the Fund and as compared to the median and mean advisory fees for similar funds as listed on Morningstar. Expense ratios for every Series, except the High Yield Bond Series, are currently below the median and mean for similar funds as listed on Morningstar. Based on their review of the information provided, the Board concluded that the fees and expenses of each Series of the Fund were reasonable on a comparative basis. |
20
Renewal of Investment Advisory Agreement (unaudited)
| · | The Board also considered the other benefits the Advisor derives from its relationship with the Fund. Such other benefits include certain research products provided by soft dollars. Given the level of soft dollar transactions involving the Fund, the Board concluded that these additional benefits to the Advisor were reasonable. |
| · | In addition to the factors described above, the Board considered the Advisor’s personnel, the Advisor’s investment strategies, the Advisor’s policies and procedures relating to compliance with personal securities transactions, and the Advisor’s reputation, expertise and resources in domestic and foreign financial markets. The Board concluded that these factors support the conclusion that the Advisor performs its services in a reasonable manner. |
| · | The Board did not consider economies of scale at this time because of the multiple uses of the Fund (for the Advisor’s discretionary investment account clients in addition to direct investors), the current profitability of the Advisor’s services to the Fund under the Agreement, and the overall size of the Fund complex. |
Based on the Board’s conclusions regarding the factors described above, the Board, including a majority of Directors that are “not interested” as defined in the Investment Company Act of 1940, approved the renewal of the Agreement for another year. In the course of their deliberations, the Directors did not identify any particular information that was all important or controlling.
21
Directors’ and Officers’ Information (unaudited)
The Statement of Additional Information provides additional information about the Fund's directors and officers and can be obtained without charge by calling 1-800-466-3863, at www.manningnapieradvisors.com, or on the EDGAR Database on the SEC Internet web site (http:\\www.sec.gov). The following chart shows certain information about the Fund's officers and directors, including their principal occupations during the last five years. Unless specific dates are provided, the individuals have held the listed positions for longer than five years.
INTERESTED DIRECTOR/OFFICER | |
| Name: | B. Reuben Auspitz* |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 59 |
| Current Position(s) Held with Fund: | Principal Executive Officer, President, Chairman & Director |
Term of Office1& Length of Time Served: | Indefinite - Director since 1984; Vice President 1984 - 2003; President since 2004; |
| | Principal Executive Officer since 2002 |
| Principal Occupation(s) During Past 5 Years: | Executive Vice President; Co-Executive Director; Executive Group Member**; Chief |
| | Compliance Officer since 2004 - Manning & Napier Advisors, Inc. President; Director - |
| | Manning & Napier Investor Services, Inc. Holds or has held one or more of |
| | the following titles for various subsidiaries and affiliates: President, Vice President, |
| | Director, Chairman, Treasurer, Chief Compliance Officer or Member. |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| | |
INDEPENDENT DIRECTORS | |
| Name: | Stephen B. Ashley |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 66 |
| Current Position(s) Held with Fund: | Director, Audit Committee Member, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1996 |
| Principal Occupation(s) During Past 5 Years: | Chairman, Director, President & Chief Executive Officer, |
| | The Ashley Group (property management and investment) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | Genesee Corp. |
| | The Ashley Group |
| | Fannie Mae |
| | |
| Name: | Peter L. Faber |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 68 |
| Current Position(s) Held with Fund: | Director, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1987 |
| Principal Occupation(s) During Past 5 Years: | Senior Counsel, McDermott, Will & Emery LLP (law firm) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | Partnership for New York City, Inc. |
| | New York Collegium |
| Name: | Harris H. Rusitzky |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 72 |
| Current Position(s) Held with Fund: | Director, Audit Committee Member, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1985 |
| Principal Occupation(s) During Past 5 Years: | President, The Greening Group (business consultants); Partner, The Restaurant Group |
| | (restaurants) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
22
Directors' and Officers' Information (unaudited)
OFFICERS | |
| Name: | Jeffrey S. Coons, Ph.D., CFA |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 43 |
| Current Position(s) Held with Fund: | Vice President |
Term of Office1& Length of Time Served: | Since 2004 |
| Principal Occupation(s) During Past 5 Years: | Co-Director of Research since 2002 & Executive Group Member**, |
| | Manning & Napier Advisors, Inc. Managing Director - Risk Management, Manning & |
| | Napier Advisors, Inc., 1993-2002. Holds one or more of the following titles for various |
| | subsidiaries and affiliates: President, Director, Treasurer or Senior Trust Officer. |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Christine Glavin |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 40 |
| Current Position(s) Held with Fund: | Principal Financial Officer, Chief Financial Officer |
Term of Office1& Length of Time Served: | Principal Financial Officer since 2002; Chief Financial Officer since 2001 |
| Principal Occupation(s) During Past 5 Years: | Fund Accounting Manager, Manning & Napier Advisors, Inc. |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Jodi L. Hedberg |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 39 |
| Current Position(s) Held with Fund: | Corporate Secretary, Chief Compliance Officer, Anti-Money Laundering Compliance |
| | Officer |
Term of Office1& Length of Time Served: | Corporate Secretary since 1997; Chief Compliance Officer since 2004 |
| Principal Occupation(s) During Past 5 Years: | Director of Compliance, Manning & Napier Advisors, Inc. and affiliates; Corporate |
| | Secretary, Manning & Napier Investor Services, Inc. since 2006 |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Alaina V. Metz |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 39 |
| Current Position(s) Held with Fund: | Special Assistant Secretary |
| Term of Office & Length of Time Served: | Indefinite - Since 2002 |
| Principal Occupation(s) During Past 5 Years: | Vice President, BISYS Fund Services Ohio, Inc. (mutual fund servicing company) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
*Interested Director, within the meaning of the Investment Company Act of 1940 by reason of his position with the Fund's investment advisor and distributor. Mr. Auspitz serves as the Executive Vice President and Director, Manning & Napier Advisors, Inc. and President and Director, Manning & Napier Investor Services, Inc., the Fund's distributor.
**The Executive Group performs the duties of the Office of the Chief Executive of Manning & Napier Advisors, Inc.
1The term of office for President, Vice President, Chief Financial Officer, and Corporate Secretary is one year and until their respective successors are chosen and qualified. All other officers' terms are indefinite.
23
[THIS PAGE INTENTIONALLY LEFT BLANK]
24
[THIS PAGE INTENTIONALLY LEFT BLANK]
25
Literature Requests (unaudited)
Proxy Voting Policies and Procedures
A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request:
By phone 1-800-466-3863
On the Securities and Exchange
Commission’s (SEC) web site http://www.sec.gov
Proxy Voting Record
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30th is available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
Quarterly Portfolio Holdings
The Series’ complete schedule of portfolio holdings for the 1st and 3rd quarters of each fiscal year are provided on Form N-Q, and are available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
The Series’ Form N-Q may be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
Prospectus and Statement of Additional Information (SAI)
The prospectus and SAI provide additional information about each Series, including charges, expenses and risks. These documents are available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
On the Advisor’s web site http://www.manningnapieradvisors.com
Additional information available at www.manningnapieradvisors.com
| 1. | Fund Holdings - Month-End |
| 2. | Fund Holdings - Quarter-End |
| 3. | Shareholder Report - Annual |
| 4. | Shareholder Report - Semi-Annual |
26
Manning & Napier Fund, Inc.
Life Sciences Series
Annual Report
December 31, 2006
Management Discussion and Analysis (unaudited)
Dear Shareholders:
Market conditions in 2006 remained challenging; however, the Life Sciences Series achieved a return that exceeded the return of the Standard & Poor’s (S&P) 500 Health Care Index for the seventh year in a row. The S&P 500 Total Return Index, driven by strength in all major sectors except Health Care, outperformed the Life Sciences Series for only the second time in the last seven years. Over the calendar year 2006, the Life Sciences Series generated a total return of 12.52%, versus the 7.52% return of the S&P 500 Health Care Index and the 15.78% return of the S&P 500 Total Return Index. Performance over the full market cycle (since 4/1/00) is stronger, both on an absolute basis and as compared to the benchmarks, with the Series beating both indices by a wide margin.
The relative performance versus the S&P 500 Health Care Index in 2006 was due in large part to the Series’ sector weightings. The main contributor to our performance among sectors was our relatively heavy weighting in Health Care Equipment and Supplies. Late in the year, an unexpected shift in political power exerted downward pressure on several health care industries such as Managed Care and Pharmacy Benefit Managers. Investors discounted these industries in anticipation of increased government control and scrutiny under Democratic Congressional leadership. Through selected investments in Health Care Equipment and Supplies companies that our analysis shows to have lower than average risk of government intervention, the Series was able to avoid the poor performance of the Health Care sector. Specifically, the Series benefited from its investments in cardiovascular, dental, and orthopedics device companies.
The other sector that drove the Series’ outperformance relative to the S&P 500 Health Care Index was health care diagnostics. Favorable demographics, health cost pressures, and new product flow are developing as strong growth drivers for the industry. Diagnostics improve health care efficiency by quickly and accurately diagnosing medical conditions. Rapid diagnosis of a medical condition is important to allow treatment before a patient’s health deteriorates and additional spending is required. We increased the Series’ position in diagnostics over the course of the year, and we continue to add to these holdings.
Health care staffing companies, which provide staffing services for public and private health care facilities, also performed well in 2006. The Series’ holdings in health care staffing companies benefited from a strong nationwide demand for nursing services. We have seen strong fundamentals in this industry, driven by a severe shortage of qualified nursing professionals.
We reduced the Series’ holdings in the Health Care Providers and Services industry on the heels of strong returns in 2004 and 2005. We believe that Providers and Services, on average, are more cyclical in nature than other health care industries. Therefore, it is critical to be cognizant of the pivotal turns in the industry’s cycle. However, we maintained our investments in Health Care Information Technology (HCIT) companies. HCIT companies are primary beneficiaries of the significant investments being made to improve the efficiency and effectiveness of the health care system through information technology.
Lastly, we maintained the Series’ weighting in the Biotechnology industry. The Biotechnology industry performed poorly in 2006 due to pipeline failures and valuation concerns; however, pipelines are increasing and moving closer to late-stage development.
We appreciate your business and wish you all the very best in the coming year.
Sincerely,
Manning & Napier Advisors, Inc.
1
Performance Update as of December 31, 2006 (unaudited)
| | Average Annual Total Returns |
| | As of December 31, 2006 |
| | One | Five | Since |
| | Year | Year | Inception1 |
Manning & Napier Fund, Inc. - Life Sciences Series2 | 12.52% | 7.04% | 17.52% |
| | | | |
Standard & Poor's (S&P) 500 Total Return Index3 | 15.78% | 6.18% | 2.12% |
| | | | |
Standard & Poor's (S&P) 500 Health Care Index3 | 7.52% | 1.68% | 2.32% |
The following graph compares the value of a $10,000 investment in the Manning & Napier Fund, Inc. - Life Sciences Series from its current activation1 (11/5/99) to present (12/31/06) to the S&P 500 Total Return Index and the S&P 500 Health Care Index.
Data for line graph to follow:
| | Manning & Napier Fund, Inc. | S&P 500 | S&P 500 Health |
| Date | Life Sciences Series2 | Total Return Index | Care Index |
| 11/5/99 | $10,000 | $10,000 | $10,000 |
| 12/31/99 | 10,800 | 10,745 | 8,933 |
| 12/31/00 | 20,229 | 9,766 | 12,138 |
| 12/31/01 | 22,596 | 8,606 | 10,662 |
| 12/31/02 | 18,544 | 6,705 | 8,800 |
| 12/31/03 | 23,994 | 8,627 | 10,125 |
| 12/31/04 | 24,721 | 9,565 | 10,290 |
| 12/31/05 | 28,222 | 10,034 | 10,959 |
| 12/31/06 | 31,756 | 11,617 | 11,783 |
1Performance numbers for the Series and Indices are calculated from November 5, 1999, the Series' current activation date.
2The Series' performance does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. The Series' performance is historical and may not be indicative of future results.
3The S&P 500 Total Return Index is an unmanaged capitalization-weighted measure of 500 widely held common stocks listed on the New York Stock Exchange, American Stock Exchange and the Over-the-Counter market. The S&P 500 Health Care Index, a sub-index of the S&P 500 Total Return Index, includes the stocks of companies involved in the business of health care related products and services. Both Indices' returns assume daily reinvestment of dividends and, unlike Series returns, do not reflect any fees or expenses.
2
Shareholder Expense Example (unaudited)
As a shareholder of the Series, you may incur two types of costs: (1) transaction costs, including potential wire charges on redemptions and (2) ongoing costs, including management fees and other Series expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Series and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (July 1, 2006 to December 31, 2006).
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Series’ actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Series’ actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid during the period. You may use this information to compare the ongoing costs of investing in the Series and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transaction costs, such as potential wire charges on redemptions. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transaction costs were included, your costs would have been higher.
| | Beginning | Ending | Expenses Paid |
| | Account Value | Account Value | During Period* |
| | 7/1/06 | 12/31/06 | 7/1/06-12/31/06 |
| Actual | $1,000.00 | $1,118.80 | $6.03 |
| Hypothetical | | | |
| (5% return before expenses) | $1,000.00 | $1,019.51 | $5.75 |
*Expenses are equal to the Series’ annualized expense ratio (for the six-month period) of 1.13%, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). Expenses are based on the most recent fiscal half year; therefore, the expense ratio stated above may differ from the expense ratio stated in the financial highlights, which is based on one-year data.
3
Portfolio Composition as of December 31, 2006 (unaudited)
Data for pie chart to follow:
Sector Allocation1
| Health Care (Biotechnology) | 9.5% |
| Health Care (Health Care Equipment & Supplies) | 45.0% |
| Health Care (Health Care Providers & Services) | 11.8% |
| Health Care (Health Care Technology) | 10.3% |
| Health Care (Life Sciences Tools & Services) | 13.1% |
| Health Care (Pharmaceuticals) | 7.0% |
| Cash, short-term investments, warrants, and liabilities, less other assets | 3.3% |
1As a percentage of net assets.
Top Ten Stock Holdings2
| Foxhollow Technologies, Inc. | 5.1% |
| Inverness Medical Innovations, Inc. | 4.7% |
| Caliper Life Sciences, Inc. | 4.3% |
| Wright Medical Group, Inc. | 4.2% |
| IntraLase Corp. | 3.6% |
| Valeant Pharmaceuticals International | 3.0% |
| Kyphon, Inc. | 3.0% |
| The Cooper Companies, Inc. | 2.9% |
| Affymetrix, Inc. | 2.9% |
| iSOFT Group plc (United Kingdom) | 2.8% |
2As a percentage of total investments.
4
Investment Portfolio - December 31, 2006
| | | Value |
| | Shares | (Note 2) |
| | | |
COMMON STOCKS - 96.7% | | |
| | | |
Health Care - 96.7% | | |
Biotechnology - 9.5% | | |
| Amgen, Inc.* | 59,500 | $4,064,445 |
| Cepheid, Inc.* | 614,000 | 5,219,000 |
| Genzyme Corp.* | 77,000 | 4,741,660 |
| Monogram Biosciences, Inc.* | 1,500,000 | 2,670,000 |
| Solexa, Inc.* (now known as Illumina, Inc.) | 407,000 | 5,352,050 |
| | | 22,047,155 |
| | | |
Health Care Equipment & Supplies - 45.0% | | |
| Advanced Medical Optics, Inc.* | 95,000 | 3,344,000 |
| Align Technology, Inc.* | 144,000 | 2,011,680 |
| Bausch & Lomb, Inc. | 64,000 | 3,331,840 |
| The Cooper Companies, Inc. | 155,000 | 6,897,500 |
| DENTSPLY International, Inc. | 119,000 | 3,552,150 |
| Dexcom, Inc.* | 450,000 | 4,437,000 |
| Edwards Lifesciences Corp.* | 108,000 | 5,080,320 |
| ev3, Inc.* | 270,000 | 4,652,100 |
| Foxhollow Technologies, Inc.* | 557,000 | 12,020,060 |
| IntraLase Corp.* | 373,194 | 8,352,082 |
| Inverness Medical Innovations, Inc.* | 132,000 | 5,108,400 |
Inverness Medical Innovations, Inc.*1,2 | 150,000 | 5,805,000 |
| Kyphon, Inc.* | 174,000 | 7,029,600 |
| Medtronic, Inc. | 66,000 | 3,531,660 |
| Mentor Corp. | 77,500 | 3,787,425 |
| Micrus Endovascular Corp.* | 114,000 | 2,175,120 |
| OraSure Technologies, Inc.* | 504,350 | 4,165,931 |
| ResMed, Inc.* | 92,000 | 4,528,240 |
| Respironics, Inc.* | 125,000 | 4,718,750 |
| Straumann Holding AG (Switzerland) (Note 8) | 2,230 | 540,062 |
| Wright Medical Group, Inc.* | 426,000 | 9,917,280 |
| | | 104,986,200 |
| | | |
Health Care Providers & Services - 11.8% | | |
| AMN Healthcare Services, Inc.* | 182,000 | 5,012,280 |
| Cross Country Healthcare, Inc.* | 225,000 | 4,909,500 |
| Healthways, Inc.* | 46,000 | 2,194,660 |
| Patterson Companies, Inc.* | 129,000 | 4,580,790 |
| Tenet Healthcare Corp.* | 852,000 | 5,938,440 |
| Triad Hospitals, Inc.* | 119,000 | 4,977,770 |
| | | 27,613,440 |
| | | |
Health Care Technology - 10.3% | | |
| AMICAS, Inc.* | 1,593,000 | 4,683,420 |
| Eclipsys Corp.* | 163,600 | 3,363,616 |
| iSOFT Group plc* (United Kingdom) (Note 8) | 5,933,883 | 6,563,516 |
| Merge Technologies, Inc.* | 587,000 | 3,850,720 |
The accompanying notes are an integral part of the financial statements.
5
Investment Portfolio - December 31, 2006
| | Shares/ | Value |
| | Principal Amount | (Note 2) |
| | | |
Health Care (continued) | | |
Health Care Technology (continued) | | |
| WebMD Health Corp. - Class A* | 140,000 | $5,602,800 |
| | | 24,064,072 |
| | | |
Life Sciences Tools & Services - 13.1% | | |
| Affymetrix, Inc.* | 295,000 | 6,802,700 |
| Caliper Life Sciences, Inc.* | 1,765,053 | 10,096,103 |
| Charles River Laboratories International, Inc.* | 138,000 | 5,968,500 |
| Invitrogen Corp.* | 53,000 | 2,999,270 |
| PerkinElmer, Inc. | 173,400 | 3,854,682 |
| QIAGEN N.V.* (Netherlands) (Note 8) | 49,550 | 749,692 |
| | | 30,470,947 |
| | | |
Pharmaceuticals - 7.0% | | |
| Novartis AG - ADR (Switzerland) (Note 8) | 83,500 | 4,796,240 |
| Sanofi-Aventis - ADR (France) (Note 8) | 95,000 | 4,386,150 |
| Valeant Pharmaceuticals International | 408,000 | 7,033,920 |
| | | 16,216,310 |
| | | |
TOTAL COMMON STOCKS | | |
| (Identified Cost $215,152,669) | | 225,398,124 |
| | | |
WARRANTS - 0.4% | | |
Health Care - 0.4% | | |
Life Sciences Tools & Services - 0.4% | | |
Caliper Life Sciences, Inc., 8/15/2010 1,3,4 | 285,000 | 301,488 |
| Caliper Life Sciences, Inc., 8/10/2011 | 401,109 | 689,907 |
| | | |
TOTAL WARRANTS | | |
| (Identified Cost $541,581) | | 991,395 |
| | | |
SHORT-TERM INVESTMENTS - 3.2% | | |
| Dreyfus Treasury Cash Management - Institutional Shares | 467,023 | 467,023 |
| Fannie Mae Discount Note, 1/11/2007 | $7,000,000 | 6,987,680 |
| | | |
TOTAL SHORT-TERM INVESTMENTS | | |
| (Identified Cost $7,457,067) | | 7,454,703 |
| | | |
TOTAL INVESTMENTS - 100.3% | | |
| (Identified Cost $223,151,317) | | 233,844,222 |
| | | |
LIABILITIES, LESS OTHER ASSETS - (0.3%) | | (772,124) |
| | | |
NET ASSETS - 100% | | $233,072,098 |
*Non-income producing security
ADR - American Depository Receipt
1Restricted securities - Investment in securities that are restricted as to public resale under the Securities Act of 1933, as amended. These securities amount to $6,106,488, or 2.6%, of the Series' net assets as of December 31, 2006.
2This security was acquired on February 3, 2006 at a cost of $3,661,500 ($24.41 per share) and has been determined to be liquid under guidelines established by the Board of Directors.
3Security has been valued at fair value.
4This security has been sold under rule 144A and has been determined to be illiquid under guidelines established by the Board of Directors.
The accompanying notes are an integral part of the financial statements.
6
Statement of Assets and Liabilities
December 31, 2006
ASSETS: | |
| | |
| Investments, at value (identified cost $223,151,317) (Note 2) | $233,844,222 |
| Cash | 86,263 |
| Foreign currency, at value (cost $13,140) | 13,415 |
| Receivable for fund shares sold | 709,824 |
| Foreign tax reclaims receivable | 77,661 |
| Dividends receivable | 48,575 |
| | |
| TOTAL ASSETS | 234,779,960 |
| | |
LIABILITIES: | |
| | |
| Accrued management fees (Note 3) | 194,553 |
| Accrued fund accounting and transfer agent fees (Note 3) | 15,878 |
| Accrued Chief Compliance Officer service fees (Note 3) | 429 |
| Accrued directors' fees (Note 3) | 189 |
| Payable for securities purchased | 1,300,726 |
| Payable for fund shares repurchased | 166,186 |
| Audit fees payable | 27,099 |
| Other payables and accrued expenses | 2,802 |
| | |
| TOTAL LIABILITIES | 1,707,862 |
| | |
TOTAL NET ASSETS | $233,072,098 |
| | |
NET ASSETS CONSIST OF: | |
| | |
| Capital stock | $204,229 |
| Additional paid-in-capital | 219,829,321 |
| Accumulated net realized gain on investments, written options, foreign currency, and other assets and liabilities | 2,341,808 |
| Net unrealized appreciation on investments, foreign currency, and other assets and liabilities | 10,696,740 |
| | |
TOTAL NET ASSETS | $233,072,098 |
| | |
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE ($233,072,098/20,422,894 shares) | $11.41 |
The accompanying notes are an integral part of the financial statements.
7
For the Year Ended December 31, 2006
INVESTMENT INCOME: | |
| | |
| Dividends (net of foreign tax withheld, $40,310) | $951,081 |
| Interest | 392,530 |
| | |
| Total Investment Income | 1,343,611 |
| | |
EXPENSES: | |
| | |
| Management fees (Note 3) | 2,146,546 |
| Fund accounting and transfer agent fees (Note 3) | 191,166 |
| Directors' fees (Note 3) | 7,100 |
| Chief Compliance Officer service fees (Note 3) | 6,195 |
| Custodian fees | 18,000 |
| Miscellaneous | 77,667 |
| | |
| Total Expenses | 2,446,674 |
| | |
| NET INVESTMENT LOSS | (1,103,063) |
| | |
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: | |
| | |
| Net realized gain (loss) on - | |
| Investments | 33,872,247 |
| Written options | 155,093 |
| Foreign currency and other assets and liabilities | (1,265) |
| | 34,026,075 |
| | |
| Net change in unrealized appreciation on - | |
| Investments | (6,059,310) |
| Written options | (34,093) |
| Foreign currency and other assets and liabilities | 8,566 |
| | (6,084,837) |
| | |
| NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS | 27,941,238 |
| | |
| NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS | $26,838,175 |
The accompanying notes are an integral part of the financial statements.
8
Statements of Changes in Net Assets
| | For the | For the |
| | Year Ended | Year Ended |
| | 12/31/06 | 12/31/05 |
INCREASE (DECREASE) IN NET ASSETS: | | |
| | | |
OPERATIONS: | | |
| | | |
| Net investment loss | $(1,103,063) | $(637,639) |
| Net realized gain on investments and foreign currency | 34,026,075 | 30,573,419 |
| Net change in unrealized appreciation on investments, written options and foreign currency | (6,084,837) | (2,939,828) |
| | | |
| Net increase from operations | 26,838,175 | 26,995,952 |
| | | |
DISTRIBUTIONS TO SHAREHOLDERS (Note 10): | | |
| | | |
| From net realized gain on investments | (37,835,088) | (23,934,912) |
| | | |
CAPITAL STOCK ISSUED AND REPURCHASED: | | |
| | | |
| Net increase from capital share transactions (Note 6) | 22,766,996 | 32,753,986 |
| | | |
| Net increase in net assets | 11,770,083 | 35,815,026 |
| | | |
NET ASSETS: | | |
| | | |
| Beginning of year | 221,302,015 | 185,486,989 |
| | | |
End of year (including undistributed net investment loss of $0 and $0, respectively) | $233,072,098 | $221,302,015 |
The accompanying notes are an integral part of the financial statements.
9
| | For the Years Ended |
| | 12/31/06 | 12/31/05 | 12/31/04 | 12/31/03 | 12/31/02 |
| | | | | | |
Per share data (for a share outstanding throughout | | | | | |
each year): | | | | | |
| | | | | | |
Net asset value - Beginning of year | $12.10 | $11.89 | $11.96 | $9.35 | $12.52 |
| | | | | | |
| Income (loss) from investment operations: | | | | | |
| Net investment loss | (0.05) | (0.04) | (0.07) | (0.02) | (0.02) |
| Net realized and unrealized gain (loss) on investments | 1.56 | 1.71 | 0.43 | 2.76 | (2.23) |
| | | | | | |
| Total from investment operations | 1.51 | 1.67 | 0.36 | 2.74 | (2.25) |
| | | | | | |
| Less distributions to shareholders: | | | | | |
| From net investment income | - | - | - | - | --2 |
| From net realized gain on investments | (2.20) | (1.46) | (0.43) | (0.13) | (0.92) |
| | | | | | |
| Total distributions to shareholders | (2.20) | (1.46) | (0.43) | (0.13) | (0.92) |
| | | | | | |
Net asset value - End of year | $11.41 | $12.10 | $11.89 | $11.96 | $9.35 |
| | | | | | |
Total return1 | 12.52% | 14.16% | 3.03% | 29.39% | (17.93%) |
| | | | | | |
Ratios (to average net assets)/Supplemental Data: | | | | | |
| Expenses* | 1.14% | 1.17% | 1.18% | 1.18% | 1.20% |
| Net investment loss | (0.51%) | (0.32%) | (0.62%) | (0.19%) | (0.25%) |
| | | | | | |
| Portfolio turnover | 93% | 110% | 109% | 86% | 76% |
| | | | | | |
Net assets - End of year (000's omitted) | $233,072 | $221,302 | $185,487 | $164,990 | $120,245 |
*The investment advisor did not impose all of its management fee in some years. If these expenses had been incurred by the Series, the expense ratio (to average net assets) would have been increased as follows:
1Represents aggregate total return for the year indicated, and assumes reinvestment of all distributions. Total return would have been lower had certain expenses not been waived during certain years.
2Less than $0.01 per share.
The accompanying notes are an integral part of the financial statements.
10
Notes to Financial Statements
1. ORGANIZATION
Life Sciences Series (the "Series") is a no-load non-diversified series of Manning & Napier Fund, Inc. (the "Fund"), formerly Exeter Fund, Inc. The Fund is organized in Maryland and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company.
The Series' investment objective is to provide long-term growth by investing principally in the common stocks of companies in the life sciences industry.
The Fund’s Advisor is Manning & Napier Advisors, Inc. (the “Advisor”). On November 5, 1999, the Series resumed sales of shares to advisory clients and employees of the Advisor and its affiliates. On May 1, 2001, the Series began offering shares directly to investors. Previously, the Series was available from time to time to advisory clients and employees of the Advisor.
The total authorized capital stock of the Fund consists of 1.7 billion shares of common stock each having a par value of $0.01. As of December 31, 2006, 1.16 billion shares have been designated in total among 21 series, of which 50 million have been designated as Life Sciences Series Class A common stock.
2. SIGNIFICANT ACCOUNTING POLICIES
Security Valuation
Portfolio securities, including domestic equities, foreign equities, exchange-traded funds and options, listed on an exchange other than the NASDAQ National Market System are valued at the latest quoted sales price of the exchange on which the security is primarily traded. Securities not traded on valuation date or securities not listed on an exchange are valued at the latest quoted bid price provided by the Fund’s pricing service. Securities listed on the NASDAQ National Market System are valued in accordance with the NASDAQ Official Closing Price.
Securities for which representative valuations or prices are not available from the Fund's pricing service may be valued at fair value. If trading or events occurring after the close of the principal market in which securities are traded are expected to materially affect the value of those securities, then they may be valued at their fair value, taking this trading or these events into account. Fair value is determined in good faith by the Advisor under procedures approved by and under the general supervision and responsibility of the Fund's Board of Directors (the “Board”).
Short-term investments that mature in sixty days or less are valued at amortized cost, which approximates market value. Investments in open-end investment companies are valued at their net asset value per share on valuation date, with the exception of exchange-traded funds as noted above.
Security Transactions, Investment Income and Expenses
Security transactions are accounted for on trade date. Dividend income is recorded on the ex-dividend date, except that if the ex-dividend date has passed, certain dividends from foreign securities are recorded as soon as the Fund is informed of the ex-dividend date. Non-cash dividends, if any, are recorded at the fair market value of the securities received. Interest income and expenses are recorded on an accrual basis.
Most expenses of the Fund can be attributed to a specific series. Expenses which cannot be directly attributed are apportioned among the series in the Fund in such a manner as deemed equitable by the Fund's Board, taking into consideration, among other things, the nature and type of expense.
11
Notes to Financial Statements
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Security Transactions, Investment Income and Expenses (continued)
Interest income, including amortization of premium and accretion of discounts using the effective interest method, is earned from settlement date and accrued daily.
The Series uses the identified cost method for determining realized gain or loss on investments for both financial statement and federal income tax reporting purposes.
Foreign Currency Translation
The books and records of the Series are maintained in U.S. dollars. Foreign currencies, investments and other assets and liabilities are translated into U.S. dollars at the current exchange rates. Purchases and sales of investment securities and income and expenses are translated on the respective dates of such transactions. The Series does not isolate realized and unrealized gains and losses attributable to changes in the exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized foreign currency gains and losses represent foreign currency gains and losses between trade date and settlement date on securities transactions, gains and losses on disposition of foreign currencies and the difference between the amount of income and foreign withholding taxes recorded on the books of the Series and the amounts actually received or paid.
Restricted Securities
Restricted securities are purchased in private placement transactions, are not registered under the Securities Act of 1933, as amended, and may have contractual restrictions on resale. Information regarding restricted securities is included at the end of the Series’ Investment Portfolio.
Illiquid Securities
A security may be considered illiquid if so deemed in good faith by the Advisor under procedures approved by and under the general supervision and responsibility of the Fund’s Board. Securities that are illiquid are marked with the applicable footnote on the Investment Portfolio.
Option Contracts
The Series may write (sell) or buy call or put options on securities and other financial instruments. When the Series writes a call, the Series gives the purchaser the right to buy the underlying security from the Series at the price specified in the option contract (the “exercise price”) at any time during the option period. When the Series writes a put option, the Series gives the purchaser the right to sell to the Series the underlying security at the exercise price at any time during the option period. The Series will only write options on a “covered basis.” This means that the Series will own the underlying security when the Series writes a call or the Series will put aside cash, U.S. Government securities, or other liquid assets in an amount not less than the exercise price at all times the put option is outstanding.
When the Series writes an option, an amount equal to the premium received is reflected as a liability and is subsequently marked-to-market to reflect the current market value of the option. The Series, as a writer of an option, has no control over whether the underlying security or financial instrument may be sold (call) or purchased (put) and, as a result, bears the market risk of an unfavorable change in the price of the security or financial instrument underlying the written option. There is a risk that the Series may not be able to enter into a closing transaction because of an illiquid market.
12
Notes to Financial Statements
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Option Contracts (continued)
The Series may also purchase options in an attempt to hedge against fluctuations in the value of its portfolio and to protect against declines in the value of the securities. The premium paid by the Series for the purchase of an option is reflected as an investment and subsequently marked-to-market to reflect the current market value of the option. The risk associated with purchasing options is limited to the premium paid.
When a security is purchased or sold through an exercise of an option, the related premium paid (or received) is added to (or deducted from) the basis of the security acquired or deducted from (or added to) the proceeds of the security sold. When an option expires (or the Series enters into a closing transaction), the Series realizes a gain or loss on the option to the extent of the premium received or paid (or gain or loss to the extent the cost of the closing transaction exceeds the premium paid or received).
The measurement of the risks associated with option contracts is meaningful only when all related and offsetting transactions are considered.
Federal Taxes
The Series' policy is to comply with the provisions of the Internal Revenue Code applicable to regulated investment companies. The Series is not subject to federal income or excise tax to the extent that the Series distributes to shareholders each year its taxable income, including any net realized gains on investments, in accordance with requirements of the Internal Revenue Code. Accordingly, no provision for federal income tax or excise tax has been made in the financial statements.
Distributions of Income and Gains
Distributions to shareholders of net investment income and net realized gains are made annually. An additional distribution may be necessary to avoid taxation of the Series. Distributions are recorded on the ex-dividend date.
Indemnifications
The Fund’s organizational documents provide former and current directors and officers with a limited indemnification against liabilities arising in connection with the performance of their duties to the Fund. In the normal course of business, the Fund may also enter into contracts that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown as this would be dependent on future claims that may be made against the Fund. The risk of material loss from such claims is considered remote.
Other
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
13
Notes to Financial Statements
3. TRANSACTIONS WITH AFFILIATES
The Fund has an Investment Advisory Agreement (the “Agreement”) with the Advisor, for which the Series pays a fee, computed daily and payable monthly, at an annual rate of 1.00% of the Series’ average daily net assets.
Under the Agreement, personnel of the Advisor provide the Series with advice and assistance in the choice of investments and the execution of securities transactions, and otherwise maintain the Series’ organization. The Advisor also provides the Fund with necessary office space and fund administration and support services. The salaries of all officers of the Fund (except a percentage of the Fund’s Chief Compliance Officer’s salary, which is paid by the Fund, and the Special Assistant Secretary’s salary, which is paid by BISYS Fund Services Ohio, Inc. (“BISYS”)), and of all Directors who are "affiliated persons" of the Fund, or of the Advisor, and all personnel of the Fund, or of the Advisor, performing services relating to research, statistical and investment activities, are paid by the Advisor. Each "non-affiliated" Director receives an annual stipend, which is allocated among all the active series of the Fund. In addition, these Directors also receive a fee per Board meeting attended for each active series of the Fund plus a fee for each committee meeting attended.
The Advisor has voluntarily agreed, during the current fiscal year, to waive its fee and, if necessary, pay other operating expenses of the Series in order to maintain total expenses for the Series at no more than 1.18% of average daily net assets each year. For the year ended December 31, 2006, the Advisor did not waive its management fee or reimburse any expenses of the Series. The Advisor is not eligible to recoup any expenses that have been waived or reimbursed in prior years.
Manning & Napier Investor Services, Inc., a registered broker-dealer affiliate of the Advisor, acts as distributor for the Fund's shares. The services of Manning & Napier Investor Services, Inc. are provided at no additional cost to the Series.
For fund accounting and transfer agent services, through October 31, 2006, the Fund paid the Advisor an annual fee of 0.12% of the Fund’s average daily net assets up to $900 million, 0.09% of the Fund’s average daily net assets between $900 million and $1.5 billion, and 0.05% of the Fund’s average daily net assets over $1.5 billion. Effective November 1, 2006, the fee rates were reduced as follows: 0.11% of the Fund’s average daily net assets up to $900 million, 0.07% of the Fund’s average daily net assets between $900 million and $1.5 billion, and 0.04% of the Fund’s average daily net assets over $1.5 billion. Additionally, certain transaction and account-based fees and out-of-pocket expenses, including charges for reporting relating to the Fund’s compliance program, are charged. Expenses not directly attributable to a series are allocated based on each series’ relative net assets or number of accounts, depending on the expense. The Advisor has an agreement with BISYS under which BISYS serves as sub-accounting services and sub-transfer agent.
4. PURCHASES AND SALES OF SECURITIES
For the year ended December 31, 2006, purchases and sales of securities, other than United States Government securities and short-term securities, were $189,224,538 and $189,163,545, respectively. There were no purchases or sales of United States Government securities.
14
Notes to Financial Statements
5. OPTIONS WRITTEN
A summary of obligations for written option contracts for the year ended December 31, 2006 is as follows:
| | Put Options | Call Options |
| | Number of Contracts | Premiums Received | Number of Contracts | Premiums Received |
| Balance at December 31, 2005 | 2,200 | $155,093 | - | $- |
| Options expired during 2006 | (2,200) | (155,093) | - | - |
| Balance at December 31, 2006 | - | $- | - | $- |
6. CAPITAL STOCK TRANSACTIONS
Transactions in shares of Life Sciences Series were:
| | For the Year | For the Year |
| | Ended 12/31/06 | Ended 12/31/05 |
| | Shares | Amount | Shares | Amount |
| Sold | 2,965,428 | $36,398,370 | 2,163,358 | $26,126,313 |
| Reinvested | 3,177,635 | 37,129,391 | 1,930,896 | 23,371,581 |
| Repurchased | (4,007,781) | (50,760,765) | (1,400,560) | (16,743,908) |
| Total | 2,135,282 | $22,766,996 | 2,693,694 | $32,753,986 |
7. FINANCIAL INSTRUMENTS
The Series may trade in financial instruments with off-balance sheet risk in the normal course of its investing activities to assist in managing exposure to various market risks. These financial instruments include written options, forward foreign currency exchange contracts and futures contracts and may involve, to a varying degree, elements of risk in excess of the amounts recognized for financial statement purposes. No such investments were held by the Series on December 31, 2006.
8. FOREIGN SECURITIES
Investing in securities of foreign companies and foreign governments involves special risks and considerations not typically associated with investing in securities of domestic companies and the United States Government. These risks include revaluation of currencies and future adverse political and economic developments. Moreover, securities of foreign companies and foreign governments and their markets may be less liquid and their prices more volatile than those of comparable domestic companies and the United States Government.
9. LIFE SCIENCES SECURITIES
The Series may focus its investments in certain related life sciences industries; hence, the Series may subject itself to a greater degree of risk than a series that is more diversified.
15
Notes to Financial Statements
10. FEDERAL INCOME TAX INFORMATION
The amount and characterization of certain income and capital gains to be distributed are determined in accordance with federal income tax regulations, which may differ from accounting principles generally accepted in the United States of America. These differences are primarily due to differing book and tax treatments in the timing of the recognition of net investment income or gains and losses, including net operating losses, foreign currency gains and losses and losses deferred due to wash sales. The Series may periodically make reclassifications among its capital accounts to reflect income and gains available for distribution (or available capital loss carryovers) under income tax regulations, without impacting the Series' net asset value. Any such reclassifications are not reflected in the financial highlights.
The tax character of distributions paid were as follows:
| | For the Year | For the Year |
| | Ended 12/31/06 | Ended 12/31/05 |
| Ordinary income | $12,093,520 | $8,210,403 |
| Long-term capital gains | 25,741,568 | 15,724,509 |
Pursuant to Section 852 of the Internal Revenue Code, as amended, the Series hereby designates the long-term capital gains disclosed above as capital gains for its taxable year ended December 31, 2006.
At December 31, 2006, the tax basis components of distributable earnings and the net unrealized appreciation based on identified cost for federal income tax purposes were as follows:
| Cost for federal income tax purposes | $223,683,401 |
| | |
| Unrealized appreciation | $25,108,654 |
| Unrealized depreciation | (14,947,833) |
| | |
| Net unrealized appreciation | $10,160,821 |
| Undistributed ordinary income | 693,120 |
| Undistributed long-term capital gains | 2,180,772 |
11. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement 109. FIN 48 supplements FASB Statement 109, Accounting for Income Taxes, by defining the confidence level that a tax position must meet in order to be recognized in the financial statements. FIN 48 provides guidance for how a fund should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the fund has taken or expects to take on a tax return. FIN 48 requires that the tax effects of a position be recognized only if it is “more likely than not” to be sustained based solely on its technical merits. Tax positions not deemed to meet the more likely than not threshold would be recorded as a tax benefit or expense in the current year. FIN 48 needs to be implemented no later than the first required financial statement reporting period for its fiscal year beginning after December 15, 2006 and is to be applied to all open tax years as of the effective date. At adoption, the financial statements must be adjusted to reflect only those tax positions that are more likely than not to be sustained as of the adoption date. Management of the Fund is currently evaluating the impact that FIN 48 will have on the Series’ financial statements.
16
Notes to Financial Statements
11. RECENT ACCOUNTING PRONOUNCEMENTS (continued)
In addition, in September 2006, FASB Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“FAS 157”) was issued, and is effective for fiscal years beginning after November 15, 2007. FAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosure about fair value measurements. The standard does not expand the use of fair value in any new circumstances, but provides clarification on acceptable fair value methods and applications. At this time, management is evaluating the implications of FAS 157, but it is not expected to materially impact the Series’ financial statements.
17
Report of Independent Registered Public Accounting Firm
To the Board of Directors of Manning & Napier Fund, Inc. and Shareholders of Life Sciences Series:
In our opinion, the accompanying statement of assets and liabilities, including the investment portfolio, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the Life Sciences Series (a series of Manning & Napier Fund, Inc., hereafter referred to as the "Series") at December 31, 2006, and the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Series’ management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Columbus, Ohio
February 9, 2007
18
Supplemental Tax Information (unaudited)
For federal income tax purposes, the Series designates for the current fiscal year $1,024,149 or, if different, the maximum amount allowable under the tax law as qualified dividend income.
19
Renewal of Investment Advisory Agreement (unaudited)
At the Manning & Napier Fund, Inc. (the “Fund”) Board of Directors’ (the “Board”) annual in-person meeting, held on November 16, 2006, the Investment Advisory Agreement (the “Agreement”) between the Fund and Manning & Napier Advisors, Inc. (the “Advisor”) was reviewed by the Board for renewal. In connection with the decision whether to renew the Agreement, a variety of material was prepared for and reviewed by the Board. In addition, at the meeting of the Board, representatives of the Advisor presented additional oral and written information to help the Board evaluate the Advisor’s performance under the Agreement over the previous year. The Board then deliberated on the renewal of the Agreement in light of the various material provided prior to and at the meeting.
In connection with its review and deliberations, the Board considered the following factors and reached a conclusion with respect to such factors.
| · | The Board considered the services provided by the Advisor under the Agreement including, among others: deciding what securities to purchase and sell for each Series; arranging for the purchase and sale of such securities by placing orders with broker-dealers; administering the affairs of the Fund (including the books and records of the Fund not maintained by third party service providers such as the custodian or sub-transfer agent); arranging for the insurance coverage for the Fund; and supervising the preparation of tax returns, SEC filings (including registration statements) and reports to shareholders for the Fund. The Board discussed the quality of these services with representatives from the Advisor and concluded that the Advisor was performing its services to the Fund required under the Agreement in a reasonable manner. |
| · | The Board considered the investment performance of the various Series of the Fund. The investment performance for each Series was reviewed on a cumulative basis since inception and on a one year basis. In addition, annualized peformance for the following time periods was considered: inception, three year, five year, ten year, and current market cycle. A market cycle includes periods of both rising and falling markets. Returns for established benchmark indices for each Series were provided for each time period. In addition, the Board considered at the meeting (and considers on a quarterly basis) a peer group performance analysis consisting of Morningstar universes of mutual funds with similar investment objectives. The Board discussed the performance with representatives from the Advisor and concluded that the investment performance of each of the Fund’s Series was reasonable based on the Fund’s actual performance and comparative performance, especially performance over the current market cycle. |
| · | The Board considered the costs of the Advisor’s services and the profits of the Advisor as they relate to the Advisor’s services to the Fund under the Agreement. In reviewing the Advisor’s costs and profits, the Board discussed the Advisor’s revenues generated from the Fund (on both an actual and adjusted basis) and its expenses associated with providing the services under the Agreement. In addition, the Board reviewed the Advisor’s expenses associated with Fund activities outside of the Agreement (such as expense reimbursements pursuant to expense caps and payments made by the Advisor to third party platforms on which shares of the Fund are available for purchase). It was noted by representatives of the Advisor that 6 of the 18 active Series of the Fund are currently experiencing expenses above the capped expense ratios. After discussing the above costs and profits, the Board concluded that the Advisor’s profitability relating to its services provided under the Agreement is reasonable. |
| · | The Board considered the fees and expenses of the various Series of the Fund. The Advisor presented the advisory fees and total expenses for each Series, including the advisory fee adjusted for any expense waivers or reimbursements (either contractual or voluntary) paid by the Advisor. The advisory fees and expense ratios of each Series were compared to an average (on both a mean and median basis) of similar funds as disclosed on the Morningstar database. Representatives of the Advisor discussed with the Board the levels of its advisory fee for each Series of the Fund and as compared to the median and mean advisory fees for similar funds as listed on Morningstar. Expense ratios for every Series, except the High Yield Bond Series, are currently below the median and mean for similar funds as listed on Morningstar. Based on their review of the information provided, the Board concluded that the fees and expenses of each Series of the Fund were reasonable on a comparative basis. |
20
Renewal of Investment Advisory Agreement (unaudited)
| · | The Board also considered the other benefits the Advisor derives from its relationship with the Fund. Such other benefits include certain research products provided by soft dollars. Given the level of soft dollar transactions involving the Fund, the Board concluded that these additional benefits to the Advisor were reasonable. |
| · | In addition to the factors described above, the Board considered the Advisor’s personnel, the Advisor’s investment strategies, the Advisor’s policies and procedures relating to compliance with personal securities transactions, and the Advisor’s reputation, expertise and resources in domestic and foreign financial markets. The Board concluded that these factors support the conclusion that the Advisor performs its services in a reasonable manner. |
| · | The Board did not consider economies of scale at this time because of the multiple uses of the Fund (for the Advisor’s discretionary investment account clients in addition to direct investors), the current profitability of the Advisor’s services to the Fund under the Agreement, and the overall size of the Fund complex. |
Based on the Board’s conclusions regarding the factors described above, the Board, including a majority of Directors that are “not interested” as defined in the Investment Company Act of 1940, approved the renewal of the Agreement for another year. In the course of their deliberations, the Directors did not identify any particular information that was all important or controlling.
21
Directors’ and Officers’ Information (unaudited)
The Statement of Additional Information provides additional information about the Fund's directors and officers and can be obtained without charge by calling 1-800-466-3863, at www.manningnapieradvisors.com, or on the EDGAR Database on the SEC Internet web site (http:\\www.sec.gov). The following chart shows certain information about the Fund's officers and directors, including their principal occupations during the last five years. Unless specific dates are provided, the individuals have held the listed positions for longer than five years.
INTERESTED DIRECTOR/OFFICER | |
| Name: | B. Reuben Auspitz* |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 59 |
| Current Position(s) Held with Fund: | Principal Executive Officer, President, Chairman & Director |
Term of Office1& Length of Time Served: | Indefinite - Director since 1984; Vice President 1984 - 2003; President since 2004; |
| | Principal Executive Officer since 2002 |
| Principal Occupation(s) During Past 5 Years: | Executive Vice President; Co-Executive Director; Executive Group Member**; Chief |
| | Compliance Officer since 2004 - Manning & Napier Advisors, Inc. President; Director - |
| | Manning & Napier Investor Services, Inc. Holds or has held one or more of |
| | the following titles for various subsidiaries and affiliates: President, Vice President, |
| | Director, Chairman, Treasurer, Chief Compliance Officer or Member. |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| | |
INDEPENDENT DIRECTORS | |
| Name: | Stephen B. Ashley |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 66 |
| Current Position(s) Held with Fund: | Director, Audit Committee Member, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1996 |
| Principal Occupation(s) During Past 5 Years: | Chairman, Director, President & Chief Executive Officer, |
| | The Ashley Group (property management and investment) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | Genesee Corp. |
| | The Ashley Group |
| | Fannie Mae |
| | |
| Name: | Peter L. Faber |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 68 |
| Current Position(s) Held with Fund: | Director, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1987 |
| Principal Occupation(s) During Past 5 Years: | Senior Counsel, McDermott, Will & Emery LLP (law firm) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | Partnership for New York City, Inc. |
| | New York Collegium |
| Name: | Harris H. Rusitzky |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 72 |
| Current Position(s) Held with Fund: | Director, Audit Committee Member, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1985 |
| Principal Occupation(s) During Past 5 Years: | President, The Greening Group (business consultants); Partner, The Restaurant Group |
| | (restaurants) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
22
Directors' and Officers' Information (unaudited)
OFFICERS | |
| Name: | Jeffrey S. Coons, Ph.D., CFA |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 43 |
| Current Position(s) Held with Fund: | Vice President |
Term of Office1& Length of Time Served: | Since 2004 |
| Principal Occupation(s) During Past 5 Years: | Co-Director of Research since 2002 & Executive Group Member**, |
| | Manning & Napier Advisors, Inc. Managing Director - Risk Management, Manning & |
| | Napier Advisors, Inc., 1993-2002. Holds one or more of the following titles for various |
| | subsidiaries and affiliates: President, Director, Treasurer or Senior Trust Officer. |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Christine Glavin |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 40 |
| Current Position(s) Held with Fund: | Principal Financial Officer, Chief Financial Officer |
Term of Office1& Length of Time Served: | Principal Financial Officer since 2002; Chief Financial Officer since 2001 |
| Principal Occupation(s) During Past 5 Years: | Fund Accounting Manager, Manning & Napier Advisors, Inc. |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Jodi L. Hedberg |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 39 |
| Current Position(s) Held with Fund: | Corporate Secretary, Chief Compliance Officer, Anti-Money Laundering Compliance |
| | Officer |
Term of Office1& Length of Time Served: | Corporate Secretary since 1997; Chief Compliance Officer since 2004 |
| Principal Occupation(s) During Past 5 Years: | Director of Compliance, Manning & Napier Advisors, Inc. and affiliates; Corporate |
| | Secretary, Manning & Napier Investor Services, Inc. since 2006 |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Alaina V. Metz |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 39 |
| Current Position(s) Held with Fund: | Special Assistant Secretary |
| Term of Office & Length of Time Served: | Indefinite - Since 2002 |
| Principal Occupation(s) During Past 5 Years: | Vice President, BISYS Fund Services Ohio, Inc. (mutual fund servicing company) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
*Interested Director, within the meaning of the Investment Company Act of 1940 by reason of his position with the Fund's investment advisor and distributor. Mr. Auspitz serves as the Executive Vice President and Director, Manning & Napier Advisors, Inc. and President and Director, Manning & Napier Investor Services, Inc., the Fund's distributor.
**The Executive Group performs the duties of the Office of the Chief Executive of Manning & Napier Advisors, Inc.
1The term of office for President, Vice President, Chief Financial Officer, and Corporate Secretary is one year and until their respective successors are chosen and qualified. All other officers' terms are indefinite.
23
[THIS PAGE INTENTIONALLY LEFT BLANK]
24
[THIS PAGE INTENTIONALLY LEFT BLANK]
25
Literature Requests (unaudited)
Proxy Voting Policies and Procedures
A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request:
By phone 1-800-466-3863
On the Securities and Exchange
Commission’s (SEC) web site http://www.sec.gov
Proxy Voting Record
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30th is available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
Quarterly Portfolio Holdings
The Series’ complete schedule of portfolio holdings for the 1st and 3rd quarters of each fiscal year are provided on Form N-Q, and are available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
The Series’ Form N-Q may be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
Prospectus and Statement of Additional Information (SAI)
The prospectus and SAI provide additional information about each Series, including charges, expenses and risks. These documents are available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
On the Advisor’s web site http://www.manningnapieradvisors.com
Additional information available at www.manningnapieradvisors.com
| 1. | Fund Holdings - Month-End |
| 2. | Fund Holdings - Quarter-End |
| 3. | Shareholder Report - Annual |
| 4. | Shareholder Report - Semi-Annual |
26
Manning & Napier Fund, Inc.
World Opportunities Series
Annual Report
December 31, 2006
Management Discussion and Analysis (unaudited)
Dear Shareholders:
The World Opportunities Series produced positive absolute and relative returns compared to its benchmarks for the year ended December 31, 2006. A weakening U.S. dollar vs. the Euro combined with healthy returns from emerging markets helped fuel international markets to strong gains. Since the current market cycle (which includes both rising and falling markets) began on January 1, 2000, the World Opportunities Series has substantially outperformed both benchmarks.
Our team of analysts uses time-tested investment strategies to choose stocks for the portfolio. These strategies include the Profile Strategy, the Hurdle Rate Strategy, and the Bankable Deal Strategy. Our investment process also follows strict pricing disciplines in order to avoid buying stocks that are not attractively valued.
The Series has a larger position than its benchmarks in the Information Technology sector as our analysts are finding exciting companies to own with attractive valuations. This sector aided the Series’ return as our holdings, which included a wireless communications service provider, a manufacturer of video conferencing systems, and a company that sells testing equipment to the telecommunications industry, exceeded the returns of the benchmarks. A majority of the stocks we hold within Information Technology fall under our Profile Strategy. In this strategy our analysts seek to identify companies that we believe can grow their earnings faster than the industries in which they operate. Typically, this is accomplished by some sustainable competitive advantage that keeps competitors from entering their markets. We also have significant positions in a variety of companies under the Profile Strategy that manufacture and distribute consumer goods on a global scale. While they earned positive returns over the year, our stocks in this sector trailed the benchmark returns. Many of the products consumers use on a daily basis, including food, beverages, and beauty products, are produced by the companies we hold in the portfolio. These firms are going through constructive improvements to gain market share and raise profit margins through increased advertising while enhancing their product mix to attract customers.
Within our Hurdle Rate Strategy, we have positions across a variety of areas. In this strategy we seek to identify industries currently in a market downturn where profits are temporarily depressed and future expectations are low. When capacity has left the industry and demand begins to pick up, we want to own those companies that are in the strongest position to increase profits and gain market share. Stocks held within this strategy, particular those in the Energy sector, performed quite strongly over the last year. Current holdings also include an aircraft maker and a manufacturer of printing presses.
Our third strategy, the Bankable Deal Strategy, looks for companies selling at extremely depressed prices as compared to their underlying assets. The Series owned only a few stocks under this strategy in the past year. An example of a stock we own is one of the premier resort destinations for families. We believed the underlying value of their properties is far below what the land the properties are located on could be sold for on the open market, a typical Bankable Deal stock to own for the portfolio. The company’s improvement in sales, marketing, and distribution efforts helped the stock to double digit returns over the past year.
Japan performed well on an absolute basis, however it trailed the benchmark over the past year. We maintained very small allocations to the country throughout the year, which contributed to the Series’ outperformance relative to the benchmark. Although the Japanese government continues to be proactive in making the economy more competitive globally, we believe valuations appear to be stretched, making us reluctant to increase positions in Japanese stocks.
Emerging markets continued to perform strongly relative to developed markets. We reduced our positions and sold into the strength throughout the year as we believed valuations did not fully reflect the risks associated with these markets. Developed economies in Europe, on the heals of an improved regulatory environment, appear to offer the most compelling return potential as compared to other regions of the world.
We appreciate your business and wish you all the very best in the coming year.
Sincerely,
Manning & Napier Advisors, Inc.
1
Performance Update as of December 31, 2006 (unaudited)
| | Average Annual Total Returns |
| | As of December 31, 2006 |
| | | | | |
| | One | Five | Ten | Since |
| | Year | Year | Year | Inception1 |
Manning & Napier Fund, Inc. - World Opportunities Series2 | 33.88% | 16.88% | 13.17% | 13.25% |
| | | | | |
Morgan Stanley Capital International (MSCI) World Index3 | 20.07% | 9.97% | 7.64% | 7.92% |
| | | | | |
Morgan Stanley Capital International (MSCI) All Country World Index ex U.S.3 | 26.65% | 16.42% | 8.29% | 8.25% |
The following graph compares the value of a $10,000 investment in the Manning & Napier Fund, Inc. - World Opportunities Series for the ten years ended December 31, 2006 to the MSCI World Index and the MSCI All Country World Index ex U.S.
Data for line graph to follow:
| | Manning & Napier Fund, Inc. | MSCI | MSCI |
| Date | World Opportunities Series2 | World Index | All Country World Index ex U.S. |
| 12/31/96 | $10,000 | $10,000 | $10,000 |
| 12/31/97 | 10,781 | 11,576 | 10,204 |
| 12/31/98 | 10,309 | 14,394 | 11,676 |
| 12/31/99 | 14,677 | 17,983 | 15,252 |
| 12/31/00 | 15,845 | 15,613 | 12,917 |
| 12/31/01 | 15,797 | 12,986 | 10,368 |
| 12/31/02 | 14,094 | 10,404 | 8,818 |
| 12/31/03 | 18,435 | 13,848 | 12,418 |
| 12/31/04 | 23,122 | 15,887 | 15,015 |
| 12/31/05 | 25,741 | 17,394 | 17,510 |
| 12/31/06 | 34,463 | 20,884 | 22,177 |
1Performance numbers for the Series are calculated from September 6, 1996, the Series' inception date. Prior to 2001, the MSCI World Index and the MSCI All Country World Index ex U.S. only published month-end numbers; therefore, performance numbers for the Indices are calculated from September 30, 1996.
2The Series' performance does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. The Series' performance is historical and may not be indicative of future results.
3The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance and consists of 23 developed market country indices. The Index returns assume daily reinvestment of net dividends (which do account for foreign dividend taxation). The MSCI All Country World Index ex U.S. is a free float-adjusted market capitalization weighted index that is designed to measure equity market performance in the global developed and emerging markets and consists of 47 developed and emerging market country indices outside the United States. The Index returns assume daily reinvestment of gross dividends (which do not account for foreign dividend taxation) prior to December 31, 1998, as net returns were not available. Subsequent to December 31, 1998, the Index returns assume daily reinvestment of net dividends (thus accounting for foreign dividend taxation). Both Indices are denominated in U.S. Dollars and, unlike Series returns, do not reflect any fees or expenses.
2
Shareholder Expense Example (unaudited)
As a shareholder of the Series, you may incur two types of costs: (1) transaction costs, including potential wire charges on redemptions and (2) ongoing costs, including management fees and other Series expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Series and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (July 1, 2006 to December 31, 2006).
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Series’ actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Series’ actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid during the period. You may use this information to compare the ongoing costs of investing in the Series and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transaction costs, such as potential wire charges on redemptions. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transaction costs were included, your costs would have been higher.
| | Beginning | Ending | Expenses Paid |
| | Account Value | Account Value | During Period* |
| | 7/1/06 | 12/31/06 | 7/1/06-12/31/06 |
| Actual | $1,000.00 | $1,182.30 | $6.38 |
| Hypothetical | | | |
| (5% return before expenses) | $1,000.00 | $1,019.36 | $5.90 |
*Expenses are equal to the Series’ annualized expense ratio (for the six-month period) of 1.16%, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). Expenses are based on the most recent fiscal half year; therefore, the expense ratio stated above may differ from the expense ratio stated in the financial highlights, which is based on one-year data.
3
Portfolio Composition as of December 31, 2006 (unaudited)
Data for pie chart to follow:
Country Allocation1
| Brazil | 3.3% |
| Canada | 2.0% |
| France | 15.4% |
| Germany | 6.0% |
| Guernsey | 2.7% |
| Israel | 3.2% |
| Netherlands | 7.1% |
| Switzerland | 17.3% |
| United Kingdom | 23.6% |
Miscellaneous2 | 8.8% |
| Cash, short-term investments, and other assets, less liabilities | 10.6% |
1As a percentage of net assets.
2Miscellaneous
Australia (1.6%)
Bermuda (0.9%)
Japan (1.0%)
Norway (1.2%)
South Korea (1.1%)
Spain (1.1%)
Sweden (0.9%)
Taiwan (1.0.%)
Sector Allocation3
| Consumer Discretionary | 11.0% |
| Consumer Staples | 13.9% |
| Energy | 6.6% |
| Financials | 16.2% |
| Health Care | 7.9% |
| Industrials | 13.0% |
| Information Technology | 15.4% |
| Materials | 5.4% |
| Cash, short-term investments, and other assets, less liabilities | 10.6% |
3As a percentage of net assets.
4
Investment Portfolio - December 31, 2006
| | | Value |
| | Shares | (Note 2) |
| | | |
COMMON STOCKS - 89.4% | | |
| | | |
Consumer Discretionary - 11.0% | | |
Auto Components - 1.0% | | |
| Autoliv, Inc. (Sweden) | 49,505 | $2,985,152 |
| | | |
Hotels, Restaurants & Leisure - 3.5% | | |
| Club Mediterranee S.A.* (France) | 205,000 | 11,039,690 |
| | | |
Media - 2.8% | | |
| Pearson plc (United Kingdom) | 401,000 | 6,056,607 |
| Reuters Group plc (United Kingdom) | 334,495 | 2,915,699 |
| | | 8,972,306 |
| | | |
Specialty Retail - 3.7% | | |
| Douglas Holding AG (Germany) | 56,625 | 2,931,289 |
| Kingfisher plc (United Kingdom) | 1,898,925 | 8,866,359 |
| | | 11,797,648 |
Total Consumer Discretionary | | 34,794,796 |
| | | |
Consumer Staples - 13.9% | | |
Beverages - 0.8% | | |
| Heineken N.V. (Netherlands) | 53,130 | 2,526,661 |
| | | |
Food & Staples Retailing - 3.0% | | |
| Carrefour S.A. (France) | 156,500 | 9,489,606 |
| | | |
Food Products - 7.6% | | |
| Cadbury Schweppes plc (United Kingdom) | 514,000 | 5,499,236 |
| Nestle S.A. (Switzerland) | 19,225 | 6,833,942 |
| Unilever plc - ADR (United Kingdom) | 428,848 | 11,930,551 |
| | | 24,263,729 |
| | | |
Personal Products - 2.5% | | |
| Clarins S.A. (France) | 105,300 | 7,970,850 |
Total Consumer Staples | | 44,250,846 |
| | | |
Energy - 6.6% | | |
Energy Equipment & Services - 5.5% | | |
| Abbot Group plc (United Kingdom) | 1,537,700 | 9,572,995 |
| Compagnie Generale de Geophysique-Veritas (CGG-Veritas)* (France) | 36,100 | 7,823,898 |
| | | 17,396,893 |
| | | |
Oil, Gas & Consumable Fuels - 1.1% | | |
| Petroleo Brasileiro S.A. (Petrobras) - ADR (Brazil) | 37,120 | 3,469,978 |
Total Energy | | 20,866,871 |
| | | |
| | | |
Financials - 16.2% | | |
Capital Markets - 1.6% | | |
| Macquarie Bank Ltd. (Australia) | 80,500 | 5,013,821 |
| | | |
Commercial Banks - 10.6% | | |
| ABN AMRO Holding N.V. (Netherlands) | 325,000 | 10,445,402 |
| Barclays plc (United Kingdom) | 409,750 | 5,855,863 |
The accompanying notes are an integral part of the financial statements.
5
Investment Portfolio - December 31, 2006
| | | Value |
| | Shares | (Note 2) |
| | | |
Financials (continued) | | |
Commercial Banks (continued) | | |
| HSBC Holdings plc (United Kingdom) | 350,705 | $6,392,059 |
| Royal Bank of Scotland Group plc (United Kingdom) | 203,300 | 7,932,202 |
| Societe Generale (France) | 18,910 | 3,209,781 |
| | | 33,835,307 |
| | | |
Diversified Financial Services - 1.1% | | |
| Financiere Marc de Lacharriere S.A. (Fimalac) (France) | 35,800 | 3,435,265 |
| | | |
Insurance - 2.9% | | |
| Allianz SE (Germany) | 30,725 | 6,282,235 |
| Willis Group Holdings Ltd. (United Kingdom) | 71,375 | 2,834,301 |
| | | 9,116,536 |
Total Financials | | 51,400,929 |
| | | |
Health Care - 7.9% | | |
Health Care Equipment & Supplies - 2.0% | | |
| Straumann Holding AG (Switzerland) | 25,860 | 6,262,786 |
| | | |
Life Sciences Tools & Services - 1.0% | | |
| QIAGEN N.V.* (Netherlands) | 214,290 | 3,242,208 |
| | | |
Pharmaceuticals - 4.9% | | |
| Novartis AG - ADR (Switzerland) | 223,075 | 12,813,428 |
| Sanofi-Aventis - ADR (France) | 57,420 | 2,651,081 |
| | | 15,464,509 |
Total Health Care | | 24,969,503 |
| | | |
Industrials - 13.0% | | |
Aerospace & Defense - 2.2% | | |
| Empresa Brasileira de Aeronautica S.A. (Embraer) - ADR (Brazil) | 167,150 | 6,921,682 |
| | | |
Air Freight & Logistics - 4.0% | | |
| Deutsche Post AG (Germany) | 206,000 | 6,226,522 |
| TNT N.V. (Netherlands) | 148,180 | 6,372,114 |
| | | 12,598,636 |
| | | |
Electrical Equipment - 3.8% | | |
| ABB Ltd. (Asea Brown Boveri) - ADR (Switzerland) | 483,305 | 8,689,824 |
| Gamesa Corporacion Tecnologica S.A. (Spain) | 123,770 | 3,406,154 |
| | | 12,095,978 |
| | | |
Industrial Conglomerates - 0.9% | | |
| Tyco International Ltd. (Bermuda) | 96,625 | 2,937,400 |
| | | |
Machinery - 2.1% | | |
| Heidelberger Druckmaschinen AG (Germany) | 74,000 | 3,508,414 |
| Schindler Holding AG (Switzerland) | 51,820 | 3,260,818 |
| | | 6,769,232 |
The accompanying notes are an integral part of the financial statements.
6
Investment Portfolio - December 31, 2006
| | Shares/ | Value |
| | Principal Amount | (Note 2) |
| | | |
Total Industrials | | $41,322,928 |
| | | |
Information Technology - 15.4% | | |
Communications Equipment - 5.5% | | |
| ECI Telecom Ltd.* (Israel) | 1,180,420 | 10,222,437 |
| Spirent Communications plc* (United Kingdom) | 3,296,950 | 3,662,919 |
| Tandberg ASA (Norway) | 243,440 | 3,671,913 |
| | | 17,557,269 |
| | | |
Electronic Equipment & Instruments - 2.1% | | |
| AU Optronics Corp. - ADR (Taiwan) | 232,310 | 3,208,201 |
| LG. Philips LCD Co. Ltd. - ADR* (South Korea) | 222,640 | 3,355,185 |
| | | 6,563,386 |
| | | |
Software - 7.8% | | |
| Aladdin Knowledge Systems Ltd.* (Israel) | 5,540 | 107,975 |
| Amdocs Ltd.* (Guernsey) | 217,950 | 8,445,563 |
| Cognos, Inc.* (Canada) | 151,175 | 6,418,891 |
| Misys plc (United Kingdom) | 799,770 | 3,385,870 |
| Square Enix Co. Ltd. (Japan) | 120,400 | 3,156,971 |
| UbiSoft Entertainment S.A.* (France) | 97,760 | 3,299,398 |
| | | 24,814,668 |
Total Information Technology | | 48,935,323 |
| | | |
Materials - 5.4% | | |
Chemicals - 5.4% | | |
| Lonza Group AG (Switzerland) | 197,925 | 17,109,845 |
| | | |
| | | |
TOTAL COMMON STOCKS | | |
| (Identified Cost $222,221,860) | | 283,651,041 |
| | | |
SHORT-TERM INVESTMENTS - 9.8% | | |
| Dreyfus Treasury Cash Management - Institutional Shares | 6,080,643 | 6,080,643 |
| Fannie Mae Discount Note, 1/26/2007 | $4,000,000 | 3,985,722 |
| U.S. Treasury Bill, 1/11/2007 | 17,000,000 | 16,975,280 |
| U.S. Treasury Bill, 2/22/2007 | 4,000,000 | 3,972,576 |
| | | |
TOTAL SHORT-TERM INVESTMENTS | | |
| (Identified Cost $31,015,782) | | 31,014,221 |
| | | |
TOTAL INVESTMENTS - 99.2% | | |
| (Identified Cost $253,237,642) | | 314,665,262 |
| | | |
OTHER ASSETS, LESS LIABILITIES - 0.8% | | 2,456,114 |
| | | |
NET ASSETS - 100% | | $317,121,376 |
*Non-income producing security
ADR - American Depository Receipt
The Series' portfolio holds, as a percentage of net assets, greater than 10% in the following countries: United Kingdom - 23.6%; Switzerland - 17.3%; France - 15.4%.
The accompanying notes are an integral part of the financial statements.
7
Statement of Assets and Liabilities
December 31, 2006
ASSETS: | |
| | |
| Investments, at value (identified cost $253,237,642) (Note 2) | $314,665,262 |
| Cash | 14 |
| Foreign currency, at value (cost $1) | 1 |
| Receivable for fund shares sold | 2,642,871 |
| Dividends receivable | 251,757 |
| Foreign tax reclaims receivable | 204,493 |
| | |
| TOTAL ASSETS | 317,764,398 |
| | |
LIABILITIES: | |
| | |
| Accrued management fees (Note 3) | 257,474 |
| Accrued fund accounting and transfer agent fees (Note 3) | 22,985 |
| Accrued Chief Compliance Officer service fees (Note 3) | 429 |
| Accrued directors' fees (Note 3) | 190 |
| Payable for fund shares repurchased | 207,266 |
| Payable for securities purchased | 108,673 |
| Audit fees payable | 31,051 |
| Other payables and accrued expenses | 14,954 |
| | |
| TOTAL LIABILITIES | 643,022 |
| | |
TOTAL NET ASSETS | $317,121,376 |
| | |
NET ASSETS CONSIST OF: | |
| | |
| Capital stock | $330,971 |
| Additional paid-in-capital | 250,351,669 |
| Undistributed net investment income | 198,631 |
| Accumulated net realized gain on investments, foreign currency, and other assets and liabilities | 4,804,331 |
| Net unrealized appreciation on investments, foreign currency, and other assets and liabilities | 61,435,774 |
| | |
TOTAL NET ASSETS | $317,121,376 |
| | |
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE - CLASS A ($317,121,376/33,097,109 shares) | $9.58 |
The accompanying notes are an integral part of the financial statements.
8
For the Year Ended December 31, 2006
INVESTMENT INCOME: | |
| | |
| Dividends (net of foreign tax withheld, $308,024) | $5,498,121 |
| Interest | 732,685 |
| | |
| Total Investment Income | 6,230,806 |
| | |
EXPENSES: | |
| | |
| Management fees (Note 3) | 2,475,585 |
| Fund accounting and transfer agent fees (Note 3) | 234,216 |
| Directors' fees (Note 3) | 7,100 |
| Chief Compliance Officer service fees (Note 3) | 6,195 |
| Custodian fees | 45,501 |
| Miscellaneous | 105,186 |
| | |
| Total Expenses | 2,873,783 |
| | |
| NET INVESTMENT INCOME | 3,357,023 |
| | |
REALIZED AND UNREALIZED GAIN ON INVESTMENTS: | |
| | |
| Net realized gain on - | |
| Investments | 41,244,231 |
| Foreign currency and other assets and liabilities | 44,382 |
| | 41,288,613 |
| | |
| Net change in unrealized appreciation on - | |
| Investments | 29,913,745 |
| Foreign currency and other assets and liabilities | 16,273 |
| | 29,930,018 |
| | |
| NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS | 71,218,631 |
| | |
| NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS | $74,575,654 |
The accompanying notes are an integral part of the financial statements.
9
Statements of Changes in Net Assets
| | For the | For the |
| | Year Ended | Year Ended |
| | 12/31/06 | 12/31/05 |
INCREASE (DECREASE) IN NET ASSETS: | | |
| | | |
OPERATIONS: | | |
| | | |
| Net investment income | $3,357,023 | $1,637,416 |
| Net realized gain on investments and foreign currency | 41,288,613 | 20,217,379 |
| Net change in unrealized appreciation on investments and foreign currency | 29,930,018 | (2,269,817) |
| | | |
| Net increase from operations | 74,575,654 | 19,584,978 |
| | | |
DISTRIBUTIONS TO SHAREHOLDERS (Note 8): | | |
| | | |
| From net investment income | (3,785,787) | (1,515,746) |
| From net realized gain on investments | (43,381,288) | (16,559,187) |
| | | |
| Total distributions to shareholders | (47,167,075) | (18,074,933) |
| | | |
CAPITAL STOCK ISSUED AND REPURCHASED: | | |
| | | |
| Net increase from capital share transactions (Note 5) | 83,077,241 | 44,230,903 |
| | | |
| Net increase in net assets | 110,485,820 | 45,740,948 |
| | | |
NET ASSETS: | | |
| | | |
| Beginning of year | 206,635,556 | 160,894,608 |
| | | |
End of year (including undistributed net investment income of $198,631 and $583,013, respectively) | $317,121,376 | $206,635,556 |
The accompanying notes are an integral part of the financial statements.
10
| | For the Years Ended |
| | 12/31/06 | 12/31/05 | 12/31/04 | 12/31/03 | 12/31/02 |
| | | | | | |
Per share data (for a share outstanding | | | | | |
throughout each year): | | | | | |
| | | | | | |
Net asset value - Beginning of year | $8.46 | $8.33 | $6.84 | $5.28 | $5.98 |
| | | | | | |
| Income (loss) from investment operations: | | | | | |
| Net investment income | 0.12 | 0.07 | 0.05 | 0.06 | 0.06 |
| Net realized and unrealized gain (loss) on investments | 2.71 | 0.87 | 1.68 | 1.56 | (0.71) |
| | | | | | |
| Total from investment operations | 2.83 | 0.94 | 1.73 | 1.62 | (0.65) |
| | | | | | |
| Less distributions to shareholders: | | | | | |
| From net investment income | (0.14) | (0.07) | (0.06) | (0.06) | - |
| From net realized gain on investments | (1.57) | (0.74) | (0.18) | --2 | (0.05) |
| | | | | | |
| Total distributions to shareholders | (1.71) | (0.81) | (0.24) | (0.06) | (0.05) |
| | | | | | |
Net asset value - End of year | $9.58 | $8.46 | $8.33 | $6.84 | $5.28 |
| | | | | | |
Total return1 | 33.88% | 11.33% | 25.42% | 30.80% | (10.78%) |
| | | | | | |
Ratios (to average net assets)/Supplemental Data: | | | | | |
| Expenses | 1.16% | 1.21% | 1.26% | 1.27%* | 1.30% |
| Net investment income | 1.35% | 0.95% | 0.75% | 1.25% | 1.10% |
| | | | | | |
| Portfolio turnover | 64% | 46% | 42% | 31% | 41% |
| | | | | | |
Net assets - End of year (000's omitted) | $317,121 | $206,636 | $160,895 | $119,845 | $78,772 |
*The investment advisor did not impose all of its management fee. If these expenses had been incurred by the Series, the expense ratio (to average net assets) for the year ended 12/31/03 would have been increased by 0.01%.
1Represents aggregate total return for the year indicated, and assumes reinvestment of all distributions. Total return would have been lower had certain expenses not been waived during the year ended 12/31/03.
2Less than $0.01 per share.
The accompanying notes are an integral part of the financial statements.
11
Notes to Financial Statements
1. ORGANIZATION
World Opportunities Series (the "Series") is a no-load diversified series of Manning & Napier Fund, Inc. (the "Fund"), formerly Exeter Fund, Inc. The Fund is organized in Maryland and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company.
The Series' investment objective is to provide long-term growth by investing principally in the common stocks of companies located around the world.
The Series is authorized to issue five classes of shares (Class A, B, C, D and E). Currently, only Class A shares have been issued. Each class of shares is substantially the same, except that class-specific distribution and shareholder servicing expenses are borne by the specific class of shares to which they relate.
The Fund’s Advisor is Manning & Napier Advisors, Inc. (the “Advisor”). Shares of the Series are offered to investors, clients and employees of the Advisor and its affiliates. The total authorized capital stock of the Fund consists of 1.7 billion shares of common stock each having a par value of $0.01. As of December 31, 2006, 1.16 billion shares have been designated in total among 21 series, of which 37.5 million have been designated as World Opportunities Series Class A common stock.
2. SIGNIFICANT ACCOUNTING POLICIES
Security Valuation
Portfolio securities, including domestic equities, foreign equities, exchange-traded funds and options, listed on an exchange other than the NASDAQ National Market System are valued at the latest quoted sales price of the exchange on which the security is primarily traded. Securities not traded on valuation date or securities not listed on an exchange are valued at the latest quoted bid price provided by the Fund’s pricing service. Securities listed on the NASDAQ National Market System are valued in accordance with the NASDAQ Official Closing Price.
Securities for which representative valuations or prices are not available from the Fund's pricing service may be valued at fair value. If trading or events occurring after the close of the principal market in which securities are traded are expected to materially affect the value of those securities, then they may be valued at their fair value, taking this trading or these events into account. Fair value is determined in good faith by the Advisor under procedures approved by and under the general supervision and responsibility of the Fund's Board of Directors (the “Board”).
Short-term investments that mature in sixty days or less are valued at amortized cost, which approximates market value. Investments in open-end investment companies are valued at their net asset value per share on valuation date, with the exception of exchange-traded funds as noted above.
Security Transactions, Investment Income and Expenses
Security transactions are accounted for on trade date. Dividend income is recorded on the ex-dividend date, except that if the ex-dividend date has passed, certain dividends from foreign securities are recorded as soon as the Fund is informed of the ex-dividend date. Non-cash dividends, if any, are recorded at the fair market value of the securities received. Interest income and expenses are recorded on an accrual basis.
12
Notes to Financial Statements
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Security Transactions, Investment Income and Expenses (continued)
Most expenses of the Fund can be attributed to a specific series. Expenses which cannot be directly attributed are apportioned among the series in the Fund in such a manner as deemed equitable by the Fund's Directors, taking into consideration, among other things, the nature and type of expense.
Interest income, including amortization of premium and accretion of discounts using the effective interest method, is earned from settlement date and accrued daily.
The Series uses the identified cost method for determining realized gain or loss on investments for both financial statement and federal income tax reporting purposes.
Foreign Currency Translation
The books and records of the Series are maintained in U.S. dollars. Foreign currencies, investments and other assets and liabilities are translated into U.S. dollars at the current exchange rates. Purchases and sales of investment securities and income and expenses are translated on the respective dates of such transactions. The Series does not isolate realized and unrealized gains and losses attributable to changes in the exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized foreign currency gains and losses represent foreign currency gains and losses between trade date and settlement date on securities transactions, gains and losses on disposition of foreign currencies and the difference between the amount of income and foreign withholding taxes recorded on the books of the Series and the amounts actually received or paid.
Federal Taxes
The Series' policy is to comply with the provisions of the Internal Revenue Code applicable to regulated investment companies. The Series is not subject to federal income or excise tax to the extent that the Series distributes to shareholders each year its taxable income, including any net realized gains on investments, in accordance with requirements of the Internal Revenue Code. Accordingly, no provision for federal income tax or excise tax has been made in the financial statements.
Distributions of Income and Gains
Distributions to shareholders of net investment income and net realized gains are made annually. An additional distribution may be necessary to avoid taxation of the Series. Distributions are recorded on the ex-dividend date.
Indemnifications
The Fund’s organizational documents provide former and current directors and officers with a limited indemnification against liabilities arising in connection with the performance of their duties to the Fund. In the normal course of business, the Fund may also enter into contracts that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown as this would be dependent on future claims that may be made against the Fund. The risk of material loss from such claims is considered remote.
Other
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
13
Notes to Financial Statements
3. TRANSACTIONS WITH AFFILIATES
The Fund has an Investment Advisory Agreement (the “Agreement”) with the Advisor, for which the Series pays a fee, computed daily and payable monthly, at an annual rate of 1.00% of the Series’ average daily net assets.
Under the Agreement, personnel of the Advisor provide the Series with advice and assistance in the choice of investments and the execution of securities transactions, and otherwise maintain the Series’ organization. The Advisor also provides the Fund with necessary office space and fund administration and support services. The salaries of all officers of the Fund (except a percentage of the Fund’s Chief Compliance Officer’s salary, which is paid by the Fund, and the Special Assistant Secretary’s salary, which is paid by BISYS Fund Services Ohio, Inc. (“BISYS”)), and of all Directors who are "affiliated persons" of the Fund, or of the Advisor, and all personnel of the Fund, or of the Advisor, performing services relating to research, statistical and investment activities, are paid by the Advisor. Each "non-affiliated" Director receives an annual stipend, which is allocated among all the active series of the Fund. In addition, these Directors also receive a fee per Board meeting attended for each active series of the Fund plus a fee for each committee meeting attended.
The Advisor has voluntarily agreed, during the current fiscal year, to waive its fee and, if necessary, pay other operating expenses of the Series in order to maintain total expenses for the Class A Series at no more than 1.27% of average daily net assets each year. For the year ended December 31, 2006, the Advisor did not waive its management fee or reimburse any expenses of the Series. The Advisor is not eligible to recoup any expenses that have been waived or reimbursed in prior years.
Manning & Napier Investor Services, Inc., a registered broker-dealer affiliate of the Advisor, acts as distributor for the Fund's shares. The services of Manning & Napier Investor Services, Inc. are provided at no additional cost to the Series.
For fund accounting and transfer agent services, through October 31, 2006, the Fund paid the Advisor an annual fee of 0.12% of the Fund’s average daily net assets up to $900 million, 0.09% of the Fund’s average daily net assets between $900 million and $1.5 billion, and 0.05% of the Fund’s average daily net assets over $1.5 billion. Effective November 1, 2006, the fee rates were reduced as follows: 0.11% of the Fund’s average daily net assets up to $900 million, 0.07% of the Fund’s average daily net assets between $900 million and $1.5 billion, and 0.04% of the Fund’s average daily net assets over $1.5 billion. Additionally, certain transaction and account-based fees and out-of-pocket expenses, including charges for reporting relating to the Fund’s compliance program, are charged. Expenses not directly attributable to a series are allocated based on each series’ relative net assets or number of accounts, depending on the expense. The Advisor has an agreement with BISYS under which BISYS serves as sub-accounting services and sub-transfer agent.
4. PURCHASES AND SALES OF SECURITIES
For the year ended December 31, 2006, purchases and sales of securities, other than United States Government securities and short-term securities, were $173,996,882 and $146,288,207, respectively. There were no purchases or sales of United States Government securities.
14
Notes to Financial Statements
5. CAPITAL STOCK TRANSACTIONS
Transactions in Class A shares of World Opportunities Series were:
| | For the Year | For the Year |
| | Ended 12/31/06 | Ended 12/31/05 |
| | Shares | Amount | Shares | Amount |
| Sold | 11,822,192 | $114,767,511 | 6,486,338 | $55,109,926 |
| Reinvested | 4,599,718 | 44,020,070 | 2,067,948 | 17,622,272 |
| Repurchased | (7,744,452) | (75,710,340) | (3,443,511) | (28,501,295) |
| Total | 8,677,458 | $83,077,241 | 5,110,775 | $44,230,903 |
Approximately 55% of the Series’ shares represent investments by fiduciary accounts over which the Advisor has sole investment discretion.
6. FINANCIAL INSTRUMENTS
The Series may trade in financial instruments with off-balance sheet risk in the normal course of its investing activities to assist in managing exposure to various market risks. These financial instruments include written options, forward foreign currency exchange contracts and futures contracts and may involve, to a varying degree, elements of risk in excess of the amounts recognized for financial statement purposes. No such investments were held by the Series on December 31, 2006.
7. FOREIGN SECURITIES
Investing in securities of foreign companies and foreign governments involves special risks and considerations not typically associated with investing in securities of domestic companies and the United States Government. These risks include revaluation of currencies and future adverse political and economic developments. Moreover, securities of foreign companies and foreign governments and their markets may be less liquid and their prices more volatile than those of comparable domestic companies and the United States Government
8. FEDERAL INCOME TAX INFORMATION
The amount and characterization of certain income and capital gains to be distributed are determined in accordance with federal income tax regulations, which may differ from accounting principles generally accepted in the United States of America. These differences are primarily due to differing book and tax treatments in the timing of the recognition of net investment income or gains and losses, including foreign currency gains and losses and losses deferred due to wash sales. The Series may periodically make reclassifications among its capital accounts to reflect income and gains available for distribution (or available capital loss carryovers) under income tax regulations, without impacting the Series' net asset value. Any such reclassifications are not reflected in the financial highlights.
The tax character of distributions paid were as follows:
| | For the Year | For the Year |
| Ended 12/31/06 | Ended 12/31/05 |
| Ordinary income | $11,373,017 | $3,790,576 |
| Long-term capital gains | 35,794,058 | 14,284,357 |
15
Notes to Financial Statements
8. FEDERAL INCOME TAX INFORMATION (continued)
Pursuant to Section 852 of the Internal Revenue Code, as amended, the Series hereby designates the long-term capital gains disclosed previously as capital gains for its taxable year ended December 31, 2006.
At December 31, 2006, the tax basis components of distributable earnings and the net unrealized appreciation based on identified cost for federal income tax purposes were as follows:
| Cost for federal income tax purposes | $253,264,372 |
| | |
| Unrealized appreciation | $61,586,357 |
| Unrealized depreciation | (185,467) |
| | |
| Net unrealized appreciation | $61,400,890 |
| Undistributed ordinary income | 2,607,016 |
| Undistributed long-term capital gains | 2,422,676 |
9. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement 109. FIN 48 supplements FASB Statement 109, Accounting for Income Taxes, by defining the confidence level that a tax position must meet in order to be recognized in the financial statements. FIN 48 provides guidance for how a fund should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the fund has taken or expects to take on a tax return. FIN 48 requires that the tax effects of a position be recognized only if it is “more likely than not” to be sustained based solely on its technical merits. Tax positions not deemed to meet the more likely than not threshold would be recorded as a tax benefit or expense in the current year. FIN 48 needs to be implemented no later than the first required financial statement reporting period for its fiscal year beginning after December 15, 2006 and is to be applied to all open tax years as of the effective date. At adoption, the financial statements must be adjusted to reflect only those tax positions that are more likely than not to be sustained as of the adoption date. Management of the Fund is currently evaluating the impact that FIN 48 will have on the Series’ financial statements.
In addition, in September 2006, FASB Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“FAS 157”) was issued, and is effective for fiscal years beginning after November 15, 2007. FAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosure about fair value measurements. The standard does not expand the use of fair value in any new circumstances, but provides clarification on acceptable fair value methods and applications. At this time, management is evaluating the implications of FAS 157, but it is not expected to materially impact the Series’ financial statements.
16
Report of Independent Registered Public Accounting Firm
To the Board of Directors of Manning & Napier Fund, Inc. and Shareholders of World Opportunities Series:
In our opinion, the accompanying statement of assets and liabilities, including the investment portfolio, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the World Opportunities Series (a series of Manning & Napier Fund, Inc., hereafter referred to as the "Series") at December 31, 2006, and the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Series’ management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Columbus, Ohio
February 9, 2007
17
Supplemental Tax Information (unaudited)
For federal income tax purposes, the Series designates for the current fiscal year $5,308,823 or, if different, the maximum amount allowable under the tax law as qualified dividend income.
18
Renewal of Investment Advisory Agreement (unaudited)
At the Manning & Napier Fund, Inc. (the “Fund”) Board of Directors’ (the “Board”) annual in-person meeting, held on November 16, 2006, the Investment Advisory Agreement (the “Agreement”) between the Fund and Manning & Napier Advisors, Inc. (the “Advisor”) was reviewed by the Board for renewal. In connection with the decision whether to renew the Agreement, a variety of material was prepared for and reviewed by the Board. In addition, at the meeting of the Board, representatives of the Advisor presented additional oral and written information to help the Board evaluate the Advisor’s performance under the Agreement over the previous year. The Board then deliberated on the renewal of the Agreement in light of the various material provided prior to and at the meeting.
In connection with its review and deliberations, the Board considered the following factors and reached a conclusion with respect to such factors.
· The Board considered the services provided by the Advisor under the Agreement including, among others: deciding what securities to purchase and sell for each Series; arranging for the purchase and sale of such securities by placing orders with broker-dealers; administering the affairs of the Fund (including the books and records of the Fund not maintained by third party service providers such as the custodian or sub-transfer agent); arranging for the insurance coverage for the Fund; and supervising the preparation of tax returns, SEC filings (including registration statements) and reports to shareholders for the Fund. The Board discussed the quality of these services with representatives from the Advisor and concluded that the Advisor was performing its services to the Fund required under the Agreement in a reasonable manner.
· The Board considered the investment performance of the various Series of the Fund. The investment performance for each Series was reviewed on a cumulative basis since inception and on a one year basis. In addition, annualized peformance for the following time periods was considered: inception, three year, five year, ten year, and current market cycle. A market cycle includes periods of both rising and falling markets. Returns for established benchmark indices for each Series were provided for each time period. In addition, the Board considered at the meeting (and considers on a quarterly basis) a peer group performance analysis consisting of Morningstar universes of mutual funds with similar investment objectives. The Board discussed the performance with representatives from the Advisor and concluded that the investment performance of each of the Fund’s Series was reasonable based on the Fund’s actual performance and comparative performance, especially performance over the current market cycle.
· The Board considered the costs of the Advisor’s services and the profits of the Advisor as they relate to the Advisor’s services to the Fund under the Agreement. In reviewing the Advisor’s costs and profits, the Board discussed the Advisor’s revenues generated from the Fund (on both an actual and adjusted basis) and its expenses associated with providing the services under the Agreement. In addition, the Board reviewed the Advisor’s expenses associated with Fund activities outside of the Agreement (such as expense reimbursements pursuant to expense caps and payments made by the Advisor to third party platforms on which shares of the Fund are available for purchase). It was noted by representatives of the Advisor that 6 of the 18 active Series of the Fund are currently experiencing expenses above the capped expense ratios. After discussing the above costs and profits, the Board concluded that the Advisor’s profitability relating to its services provided under the Agreement is reasonable.
· The Board considered the fees and expenses of the various Series of the Fund. The Advisor presented the advisory fees and total expenses for each Series, including the advisory fee adjusted for any expense waivers or reimbursements (either contractual or voluntary) paid by the Advisor. The advisory fees and expense ratios of each Series were compared to an average (on both a mean and median basis) of similar funds as disclosed on the Morningstar database. Representatives of the Advisor discussed with the Board the levels of its advisory fee for each Series of the Fund and as compared to the median and mean advisory fees for similar funds as listed on Morningstar. Expense ratios for every Series, except the High Yield Bond Series, are currently below the median and mean for similar funds as listed on Morningstar. Based on their review of the information provided, the Board concluded that the fees and expenses of each Series of the Fund were reasonable on a comparative basis.
19
Renewal of Investment Advisory Agreement (unaudited)
· The Board also considered the other benefits the Advisor derives from its relationship with the Fund. Such other benefits include certain research products provided by soft dollars. Given the level of soft dollar transactions involving the Fund, the Board concluded that these additional benefits to the Advisor were reasonable.
· In addition to the factors described above, the Board considered the Advisor’s personnel, the Advisor’s investment strategies, the Advisor’s policies and procedures relating to compliance with personal securities transactions, and the Advisor’s reputation, expertise and resources in domestic and foreign financial markets. The Board concluded that these factors support the conclusion that the Advisor performs its services in a reasonable manner.
· The Board did not consider economies of scale at this time because of the multiple uses of the Fund (for the Advisor’s discretionary investment account clients in addition to direct investors), the current profitability of the Advisor’s services to the Fund under the Agreement, and the overall size of the Fund complex.
Based on the Board’s conclusions regarding the factors described above, the Board, including a majority of Directors that are “not interested” as defined in the Investment Company Act of 1940, approved the renewal of the Agreement for another year. In the course of their deliberations, the Directors did not identify any particular information that was all important or controlling.
20
Directors’ and Officers’ Information (unaudited)
The Statement of Additional Information provides additional information about the Fund's directors and officers and can be obtained without charge by calling 1-800-466-3863, at www.manningnapieradvisors.com, or on the EDGAR Database on the SEC Internet web site (http:\\www.sec.gov). The following chart shows certain information about the Fund's officers and directors, including their principal occupations during the last five years. Unless specific dates are provided, the individuals have held the listed positions for longer than five years.
INTERESTED DIRECTOR/OFFICER | |
| Name: | B. Reuben Auspitz* |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 59 |
| Current Position(s) Held with Fund: | Principal Executive Officer, President, Chairman & Director |
Term of Office1& Length of Time Served: | Indefinite - Director since 1984; Vice President 1984 - 2003; President since 2004; |
| | Principal Executive Officer since 2002 |
| Principal Occupation(s) During Past 5 Years: | Executive Vice President; Co-Executive Director; Executive Group Member**; Chief |
| | Compliance Officer since 2004 - Manning & Napier Advisors, Inc. President; Director - |
| | Manning & Napier Investor Services, Inc. Holds or has held one or more of |
| | the following titles for various subsidiaries and affiliates: President, Vice President, |
| | Director, Chairman, Treasurer, Chief Compliance Officer or Member. |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| | |
INDEPENDENT DIRECTORS | |
| Name: | Stephen B. Ashley |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 66 |
| Current Position(s) Held with Fund: | Director, Audit Committee Member, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1996 |
| Principal Occupation(s) During Past 5 Years: | Chairman, Director, President & Chief Executive Officer, |
| | The Ashley Group (property management and investment) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | Genesee Corp. |
| | The Ashley Group |
| | Fannie Mae |
| | |
| Name: | Peter L. Faber |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 68 |
| Current Position(s) Held with Fund: | Director, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1987 |
| Principal Occupation(s) During Past 5 Years: | Senior Counsel, McDermott, Will & Emery LLP (law firm) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | Partnership for New York City, Inc. |
| | New York Collegium |
| Name: | Harris H. Rusitzky |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 72 |
| Current Position(s) Held with Fund: | Director, Audit Committee Member, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1985 |
| Principal Occupation(s) During Past 5 Years: | President, The Greening Group (business consultants); Partner, The Restaurant Group |
| | (restaurants) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
21
Directors' and Officers' Information (unaudited)
OFFICERS | |
| Name: | Jeffrey S. Coons, Ph.D., CFA |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 43 |
| Current Position(s) Held with Fund: | Vice President |
Term of Office1& Length of Time Served: | Since 2004 |
| Principal Occupation(s) During Past 5 Years: | Co-Director of Research since 2002 & Executive Group Member**, |
| | Manning & Napier Advisors, Inc. Managing Director - Risk Management, Manning & |
| | Napier Advisors, Inc., 1993-2002. Holds one or more of the following titles for various |
| | subsidiaries and affiliates: President, Director, Treasurer or Senior Trust Officer. |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Christine Glavin |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 40 |
| Current Position(s) Held with Fund: | Principal Financial Officer, Chief Financial Officer |
Term of Office1& Length of Time Served: | Principal Financial Officer since 2002; Chief Financial Officer since 2001 |
| Principal Occupation(s) During Past 5 Years: | Fund Accounting Manager, Manning & Napier Advisors, Inc. |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Jodi L. Hedberg |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 39 |
| Current Position(s) Held with Fund: | Corporate Secretary, Chief Compliance Officer, Anti-Money Laundering Compliance |
| | Officer |
Term of Office1& Length of Time Served: | Corporate Secretary since 1997; Chief Compliance Officer since 2004 |
| Principal Occupation(s) During Past 5 Years: | Director of Compliance, Manning & Napier Advisors, Inc. and affiliates; Corporate |
| | Secretary, Manning & Napier Investor Services, Inc. since 2006 |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Alaina V. Metz |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 39 |
| Current Position(s) Held with Fund: | Special Assistant Secretary |
| Term of Office & Length of Time Served: | Indefinite - Since 2002 |
| Principal Occupation(s) During Past 5 Years: | Vice President, BISYS Fund Services Ohio, Inc. (mutual fund servicing company) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
*Interested Director, within the meaning of the Investment Company Act of 1940 by reason of his position with the Fund's investment advisor and distributor. Mr. Auspitz serves as the Executive Vice President and Director, Manning & Napier Advisors, Inc. and President and Director, Manning & Napier Investor Services, Inc., the Fund's distributor.
**The Executive Group performs the duties of the Office of the Chief Executive of Manning & Napier Advisors, Inc.
1The term of office for President, Vice President, Chief Financial Officer, and Corporate Secretary is one year and until their respective successors are chosen and qualified. All other officers' terms are indefinite.
22
Literature Requests (unaudited)
Proxy Voting Policies and Procedures
A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request:
By phone 1-800-466-3863
On the Securities and Exchange
Commission’s (SEC) web site http://www.sec.gov
Proxy Voting Record
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30th is available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
Quarterly Portfolio Holdings
The Series’ complete schedule of portfolio holdings for the 1st and 3rd quarters of each fiscal year are provided on Form N-Q, and are available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
The Series’ Form N-Q may be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
Prospectus and Statement of Additional Information (SAI)
The prospectus and SAI provide additional information about each Series, including charges, expenses and risks. These documents are available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
On the Advisor’s web site http://www.manningnapieradvisors.com
Additional information available at www.manningnapieradvisors.com
| 1. | Fund Holdings - Month-End |
| 2. | Fund Holdings - Quarter-End |
| 3. | Shareholder Report - Annual |
| 4. | Shareholder Report - Semi-Annual |
23
Manning & Napier Fund, Inc.
Technology Series
Annual Report
December 31, 2006
Management Discussion and Analysis (unaudited)
Dear Shareholders:
Building off its strong performance in previous years, the Technology Series again outperformed its primary benchmark, the Standard & Poor’s (S&P) 500 Information Technology Index, in 2006. For the year, the Series posted a return of 24.37% as compared to the 8.41% return experienced by the S&P 500 Information Technology Index. The result marked the sixth consecutive year the Technology Series outperformed its benchmark.
Once again in 2006, the performance of technology stocks was highly volatile. Similar to 2004 and 2005, technology stocks were significant underperformers over the course of the first half of the year, largely attributable to broader macroeconomic concerns about inflation, interest rates and rising energy prices. This was followed by a sharp, distinct move upwards over the balance of 2006, in which technology stocks outperformed the broader market indices by a significant margin. However, despite the strong appreciation in technology stocks witnessed over the last six months, 2006 marked the third straight year in which the return of technology stocks as a whole lagged that of the broader market. The Technology Series outperformed both the technology sector, as measured by the S&P 500 Information Technology Index, and the broader market, as measured by the S&P 500 Total Return Index.
Given the dichotomy that existed for technology stocks in 2006, we believe the year was yet another that favored skillful, bottom-up stock selection. Importantly, the commitment of technology companies to continuously innovate and develop new products and services demonstrated no signs of abating, and the spending intentions for information technology on the part of cash-rich enterprises maintained strength. As such, the significant volatility in the technology sector favored our approach of patiently focusing on our investment strategies to help us stay invested and minimize downside risk when the markets were turbulent, and identify compelling buying opportunities when stocks became oversold.
Within the technology sector, we primarily concentrate on 1) industry sectors enjoying secular (i.e., non-cyclical) tailwinds, and 2) high quality companies that fit our investment strategies, operate with sound business models, and are building sustainable competitive advantages. These two rules of thumb again had the strongest influence on the industries to which we increased and decreased exposure in 2006. Over the course of the year, the Series increased its holdings in the communications equipment, data networking, and software sectors, and decreased its positions in semiconductor manufacturing, semiconductor equipment, and Telecommunication Services.
Communications Equipment started 2006 as the Series’ largest weighting, and over the course of the year, we increased the Series’ position even more before gradually paring it back to the original weighting as our investments appreciated. Large amounts of data suggest we remain at the early stages of a secular migration from networks based on legacy protocols to networks based on Internet Protocol, or IP. Due to increased competition and severe under-spending since the bubble years, telecommunications carriers and enterprises alike are increasing their capital spending and devoting a significantly larger share of their spending to network equipment that facilitates the move to IP. Richer forms of content soaking up bandwidth, combined with compelling new technologies like Voice and Video over IP, wireless local area networks, mobile computing/data access, wireless email, and intelligent switches, are serving as catalysts to spend for both carriers and enterprises.
On account of these trends, the communications equipment and data networking industries registered some of the strongest performance in the technology sector overall in 2006, and our investments in the same enjoyed even stronger performance. Combined with our overweighted posture throughout 2006, the communications and networking equipment areas were strong contributors to the Series’ outperformance relative to the benchmark in 2006.
Another area of increased investment for the Series during 2006 was the software industry, which both maintained its overweight stance and became the Series’ largest industry position at year end. Within software, our investments focused on a variety of areas, including on-demand (web-based) software, security & authentication, infrastructure software, business intelligence, speech recognition, testing software, and product lifecycle management. Many of these areas are experiencing meaningful secular growth drivers brought on by the explosion of digital data and the changes going on within the software industry mentioned above, and others continue to top enterprise spending surveys given their ability
1
Management Discussion and Analysis (unaudited)
to contribute to competitive advantage. Generally speaking, the software industry turned in a mixed performance in 2006, but the software investments undertaken by the Series during the year performed well and positively contributed to the Series’ outperformance.
One area where the Series reduced its holdings during the year was the semiconductor and semiconductor equipment industries, moving from a moderately underweight position at the beginning of the year to one that was dramatically underweight by year-end. While the communications and consumer electronics sectors continued to underpin solid demand growth for semiconductors, rising inventories at the semiconductor manufacturer level and at distributors, lighter demand from the computing sector, and early indications that semiconductor manufacturers were beginning to add manufacturing capacity at rates beyond the long-term unit demand trend of semiconductors suggested we take profits on the positions we had. While we were able to realize solid gains in our semiconductor and semiconductor capital equipment investments during the year, contributing to the Series’ outperformance overall, our progressively underweight stance in the Semiconductor Equipment industry in particular acted as a drag on performance in the second half of the year as semiconductor manufacturers bought more equipment than expected to fill out their advanced-node fabs. Conversely, our underweight posture in the Semiconductor industry over the balance of the year helped the Series’ performance as semiconductor stocks underperformed technology indices overall.
Another area where the Series was underweight during 2006 was Telecommunication Services. Currently, this sector is experiencing significant technological changes and increasing convergence among traditional incumbent service providers and new entrants such as cable. At the same time, high penetration levels of communications services in developed economies have hurt pricing power in telecom services and increased the emphasis on new data services for growth. Moreover, the capital intensity of the telecom services industry continues to increase in support of these new services. Despite these headwinds, the wireline and wireless telecommunication services industries performed exceptionally well in 2006, driven by increased merger and acquisition activity and historically low valuations and free cash flow yields. As a result, our decision to not invest in this sector lessened the Series’ outperformance relative to its benchmark.
We appreciate your business and wish you all the very best in the coming year.
Sincerely,
Manning & Napier Advisors, Inc.
2
Performance Update as of December 31, 2006 (unaudited)
| | Average Annual Total Returns |
| | As of December 31, 2006 |
| | | | |
| | One | Five | Since |
| | Year | Year | Inception1 |
Manning & Napier Fund, Inc. - Technology Series2 | 24.37% | 11.99% | 0.63% |
| | | | |
Standard & Poor's (S&P) 500 Total Return Index3 | 15.78% | 6.18% | 0.98% |
| | | | |
Standard & Poor's (S&P) 500 Information Technology Index3 | 8.41% | 0.68% | -11.70% |
The following graph compares the value of a $10,000 investment in the Manning & Napier Fund, Inc. - Technology Series from its current activation1 (8/8/00) to present (12/31/06) to the S&P 500 Total Return Index and the S&P 500 Information Technology Index.
Data for line graph to follow:
| | Manning & Napier Fund, Inc. | S&P 500 | S&P 500 Information |
| Date | Technology Series2 | Total Return Index | Technology Index |
| 8/8/00 | $10,000 | $10,000 | $10,000 |
| 12/31/00 | 7,160 | 8,945 | 5,972 |
| 12/31/01 | 5,910 | 7,883 | 4,552 |
| 12/31/02 | 3,730 | 6,142 | 2,728 |
| 12/31/03 | 7,440 | 7,902 | 4,017 |
| 12/31/04 | 8,190 | 8,761 | 4,120 |
| 12/31/05 | 8,370 | 9,191 | 4,161 |
| 12/31/06 | 10,410 | 10,641 | 4,511 |
1Performance numbers for the Series and Indices are calculated from August 8, 2000, the Series' current activation date.
2The Series' performance does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. The Series' performance is historical and may not be indicative of future results. If a shareholder had made an original investment of $10,000 on the previous activation date of August 29, 1994 and held the investment through the liquidation date on April 16, 1997, the average annual return would have been 28.23% versus 22.62% for the S&P 500 Total Return Index for the same time period.
3The S&P 500 Total Return Index is an unmanaged capitalization-weighted measure of 500 widely held common stocks listed on the New York Stock Exchange, American Stock Exchange and the Over-the-Counter market. The S&P 500 Information Technology Index, a sub-index of the S&P 500 Total Return Index, includes the stocks of companies involved in the business of technology related products and services. Both Indices' returns assume daily reinvestment of dividends and, unlike Series returns, do not reflect any fees or expenses.
3
Shareholder Expense Example (unaudited)
As a shareholder of the Series, you may incur two types of costs: (1) transaction costs, including potential wire charges on redemptions and (2) ongoing costs, including management fees and other Series expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Series and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (July 1, 2006 to December 31, 2006).
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Series’ actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Series’ actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid during the period. You may use this information to compare the ongoing costs of investing in the Series and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transaction costs, such as potential wire charges on redemptions. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transaction costs were included, your costs would have been higher.
| | Beginning | Ending | Expenses Paid |
| | Account Value | Account Value | During Period* |
| | 7/1/06 | 12/31/06 | 7/1/06-12/31/06 |
| Actual | $1,000.00 | $1,195.20 | $6.31 |
| Hypothetical | | | |
| (5% return before expenses) | $1,000.00 | $1,019.46 | $5.80 |
*Expenses are equal to the Series’ annualized expense ratio (for the six-month period) of 1.14%, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). Expenses are based on the most recent fiscal half year; therefore, the expense ratio stated above may differ from the expense ratio stated in the financial highlights, which is based on one-year data.
4
Portfolio Composition as of December 31, 2006 (unaudited)
Data for pie chart to follow:
Sector Allocation1
| Consumer Discretionary | 6.0% |
| Industrials | 2.4% |
| Information Technology (Communications Equipment) | 21.6% |
| Information Technology (Computers & Peripherals) | 6.6% |
| Information Technology (Electronic Equipment & Instruments) | 7.5% |
| Information Technology (IT Services) | 6.7% |
| Information Technology (Semiconductors & Semiconductor Equipment) | 2.1% |
| Information Technology (Software) | 32.8% |
| Telecommunication Services | 3.1% |
| Cash, short-term investments, and other assets, less liabilities | 11.2% |
1As a percentage of net assets.
Top Ten Stock Holdings2
| Cisco Systems, Inc. | 5.5% |
| NAVTEQ Corp. | 4.7% |
| LoJack Corp. | 4.4% |
| International Game Technology | 4.3% |
| RightNow Technologies, Inc. | 4.2% |
| Borland Software Corp. | 4.0% |
| ECI Telecom Ltd. (Israel) | 3.9% |
| Salesforce.com, Inc. | 3.9% |
| TIBCO Software, Inc. | 3.8% |
| Amdocs Ltd. (Guernsey) | 3.8% |
2As a percentage of total investments.
5
Investment Portfolio - December 31, 2006
| | | Value |
| | Shares | (Note 2) |
| | | |
COMMON STOCKS - 88.8% | | |
| | | |
Consumer Discretionary - 6.0% | | |
Hotels, Restaurants & Leisure - 4.3% | | |
| International Game Technology | 155,000 | $7,161,000 |
| | | |
Internet & Catalog Retail - 1.7% | | |
| Audible, Inc.* | 365,825 | 2,900,992 |
Total Consumer Discretionary | | 10,061,992 |
| | | |
Industrials - 2.4% | | |
Industrial Conglomerates - 2.4% | | |
| 3M Co. | 50,500 | 3,935,465 |
| | | |
Information Technology - 77.3% | | |
Communications Equipment - 21.6% | | |
| Blue Coat Systems, Inc.* | 255,900 | 6,128,805 |
| Cisco Systems, Inc.* | 337,000 | 9,210,210 |
| ECI Telecom Ltd.* (Israel) (Note 7) | 760,000 | 6,581,600 |
| Ixia* | 416,000 | 3,993,600 |
| Juniper Networks, Inc.* | 270,000 | 5,113,800 |
| Spirent Communications plc* (United Kingdom) (Note 7) | 4,560,000 | 5,066,171 |
| | | 36,094,186 |
| | | |
Computers & Peripherals - 6.6% | | |
| Avid Technology, Inc.* | 168,000 | 6,259,680 |
| EMC Corp.* | 364,000 | 4,804,800 |
| | | 11,064,480 |
| | | |
Electronic Equipment & Instruments - 7.5% | | |
| LG. Philips LCD Co. Ltd. - ADR* (South Korea) (Note 7) | 340,000 | 5,123,800 |
| LoJack Corp.* | 432,000 | 7,378,560 |
| | | 12,502,360 |
| | | |
IT Services - 6.7% | | |
| CheckFree Corp.* | 103,000 | 4,136,480 |
| RightNow Technologies, Inc.* | 411,000 | 7,077,420 |
| | | 11,213,900 |
| | | |
Semiconductors & Semiconductor Equipment - 2.1% | | |
| Genesis Microchip, Inc.* | 352,000 | 3,569,280 |
| | | |
Software - 32.8% | | |
| Agile Software Corp.* | 536,000 | 3,296,400 |
| Aladdin Knowledge Systems Ltd.* (Israel) (Note 7) | 102,500 | 1,997,725 |
| Amdocs Ltd.* (Guernsey) (Note 7) | 163,000 | 6,316,250 |
| Applix, Inc.* | 440,000 | 4,994,000 |
The accompanying notes are an integral part of the financial statements.
6
Investment Portfolio - December 31, 2006
| | Shares/ | Value |
| | Principal Amount | (Note 2) |
| | | |
Information Technology (continued) | | |
Software (continued) | | |
| Borland Software Corp.* | 1,234,000 | $6,712,960 |
| NAVTEQ Corp.* | 225,800 | 7,896,226 |
| Nuance Communications, Inc.* | 475,000 | 5,443,500 |
| Salesforce.com, Inc.* | 178,000 | 6,488,100 |
| Symantec Corp.* | 258,000 | 5,379,300 |
| TIBCO Software, Inc.* | 672,000 | 6,343,680 |
| | | 54,868,141 |
Total Information Technology | | 129,312,347 |
| | | |
Telecommunication Services - 3.1% | | |
Diversified Telecommunication Services - 3.1% | | |
| iPass, Inc.* | 884,000 | 5,197,920 |
| | | |
TOTAL COMMON STOCKS | | |
| (Identified Cost $132,706,968) | | 148,507,724 |
| | | |
SHORT-TERM INVESTMENTS - 11.1% | | |
| Dreyfus Treasury Cash Management - Institutional Shares | 3,624,108 | 3,624,108 |
| U.S. Treasury Bill, 1/11/2007 | $15,000,000 | 14,978,286 |
| | | |
TOTAL SHORT-TERM INVESTMENTS | | |
| (Identified Cost $18,604,368) | | 18,602,394 |
| | | |
TOTAL INVESTMENTS - 99.9% | | |
| (Identified Cost $151,311,336) | | 167,110,118 |
| | | |
OTHER ASSETS, LESS LIABILITIES - 0.1% | | 142,172 |
| | | |
NET ASSETS - 100% | | $167,252,290 |
*Non-income producing security
ADR - American Depository Receipt
The accompanying notes are an integral part of the financial statements.
7
Statement of Assets and Liabilities
December 31, 2006
ASSETS: | |
| | |
| Investments, at value (identified cost $151,311,336) (Note 2) | $167,110,118 |
| Receivable for fund shares sold | 636,244 |
| Dividends receivable | 104,667 |
| Foreign tax reclaims receivable | 953 |
| | |
| TOTAL ASSETS | 167,851,982 |
| | |
LIABILITIES: | |
| | |
| Accrued management fees (Note 3) | 140,941 |
| Accrued fund accounting and transfer agent fees (Note 3) | 11,988 |
| Accrued Chief Compliance Officer service fees (Note 3) | 429 |
| Accrued directors' fees (Note 3) | 212 |
| Payable for securities purchased | 374,423 |
| Payable for fund shares repurchased | 39,682 |
| Audit fees payable | 26,102 |
| Other payables and accrued expenses | 5,915 |
| | |
| TOTAL LIABILITIES | 599,692 |
| | |
TOTAL NET ASSETS | $167,252,290 |
| | |
NET ASSETS CONSIST OF: | |
| | |
| Capital stock | $160,640 |
| Additional paid-in-capital | 161,935,084 |
| Accumulated net realized loss on investments, foreign currency, and other assets and liabilities | (10,642,216) |
| Net unrealized appreciation on investments | 15,798,782 |
| | |
TOTAL NET ASSETS | $167,252,290 |
| | |
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE ($167,252,290/16,063,996 shares) | $10.41 |
The accompanying notes are an integral part of the financial statements.
8
For the Year Ended December 31, 2006
INVESTMENT INCOME: | |
| | |
| Dividends (net of foreign tax withheld, $6,672) | $1,125,305 |
| Interest | 261,497 |
| | |
| Total Investment Income | 1,386,802 |
| | |
EXPENSES: | |
| | |
| Management fees (Note 3) | 1,366,747 |
| Fund accounting and transfer agent fees (Note 3) | 123,546 |
| Directors' fees (Note 3) | 7,100 |
| Chief Compliance Officer service fees (Note 3) | 6,195 |
| Custodian fees | 13,700 |
| Miscellaneous | 67,504 |
| | |
| Total Expenses | 1,584,792 |
| | |
| NET INVESTMENT LOSS | (197,990) |
| | |
REALIZED AND UNREALIZED GAIN ON INVESTMENTS: | |
| | |
| Net realized gain on - | |
| Investments | 16,096,728 |
| Foreign currency and other assets and liabilities | 1,046 |
| | 16,097,774 |
| | |
| Net change in unrealized appreciation on investments | 14,064,805 |
| | |
| NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS | 30,162,579 |
| | |
| NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS | $29,964,589 |
The accompanying notes are an integral part of the financial statements.
9
Statements of Changes in Net Assets
| | For the | For the |
| | Year Ended | Year Ended |
| | 12/31/06 | 12/31/05 |
| | | |
INCREASE (DECREASE) IN NET ASSETS: | | |
| | | |
OPERATIONS: | | |
| | | |
| Net investment loss | $(197,990) | $(432,807) |
| Net realized gain on investments and foreign currency | 16,097,774 | 17,451,714 |
| Net change in unrealized appreciation on investments | 14,064,805 | (9,195,898) |
| | | |
| Net increase from operations | 29,964,589 | 7,823,009 |
| | | |
CAPITAL STOCK ISSUED AND REPURCHASED: | | |
| | | |
| Net increase from capital share transactions (Note 5) | 26,632,096 | 39,511,796 |
| | | |
| Net increase in net assets | 56,596,685 | 47,334,805 |
| | | |
NET ASSETS: | | |
| | | |
| Beginning of year | 110,655,605 | 63,320,800 |
| | | |
End of year (including undistributed net investment loss of $0 and $0, respectively) | $167,252,290 | $110,655,605 |
The accompanying notes are an integral part of the financial statements.
10
| | For the Years Ended |
| | 12/31/06 | 12/31/05 | 12/31/04 | 12/31/03 | 12/31/02 |
| | | | | | |
Per share data (for a share outstanding | | | | | |
throughout each year): | | | | | |
| | | | | | |
Net asset value - Beginning of year | $8.37 | $8.19 | $7.44 | $3.73 | $5.91 |
| | | | | | |
| Income (loss) from investment operations: | | | | | |
| Net investment loss | (0.01) | (0.03) | (0.04)1 | (0.03) | (0.03)1 |
| Net realized and unrealized gain (loss) on investments | 2.05 | 0.21 | 0.79 | 3.74 | (2.15) |
| | | | | | |
| Total from investment operations | 2.04 | 0.18 | 0.75 | 3.71 | (2.18) |
| | | | | | |
Net asset value - End of year | $10.41 | $8.37 | $8.19 | $7.44 | $3.73 |
| | | | | | |
Total return2 | 24.37% | 2.20% | 10.08% | 99.46% | (36.89%) |
| | | | | | |
Ratios (to average net assets)/Supplemental Data: | | | | | |
| Expenses* | 1.16% | 1.20% | 1.20% | 1.20% | 1.20% |
| Net investment loss | (0.14%) | (0.48%) | (0.52%) | (0.58%) | (0.71%) |
| | | | | | |
| Portfolio turnover | 83% | 116% | 50% | 83% | 137% |
| | | | | | |
Net assets - End of year (000's omitted) | $167,252 | $110,656 | $63,321 | $20,032 | $10,178 |
*The investment advisor did not impose all of its management fee in some years. If these expenses had been incurred by the Series, the expense ratio (to average net assets) would have been increased as follows:
1Calculated based on average shares outstanding during the year.
2Represents aggregate total return for the year indicated, and assumes reinvestment of all distributions. Total return would have been lower had certain expenses not been waived during certain years.
The accompanying notes are an integral part of the financial statements.
11
Notes to Financial Statements
1. ORGANIZATION
Technology Series (the "Series") is a no-load non-diversified series of Manning & Napier Fund, Inc. (the "Fund"), formerly Exeter Fund, Inc. The Fund is organized in Maryland and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company.
The Series' investment objective is to provide long-term growth by investing principally in the common stocks of companies in technology-based industries.
The Fund’s Advisor is Manning & Napier Advisors, Inc. (the “Advisor”). On August 8, 2000, the Series resumed sales of shares to advisory clients and employees of the Advisor and its affiliates. The Series resumed offering shares directly to investors on May 18, 2004, as it had done previously from time to time.
The total authorized capital stock of the Fund consists of 1.7 billion shares of common stock each having a par value of $0.01. As of December 31, 2006, 1.16 billion shares have been designated in total among 21 series, of which 50 million have been designated as Technology Series Class A common stock.
2. SIGNIFICANT ACCOUNTING POLICIES
Security Valuation
Portfolio securities, including domestic equities, foreign equities, exchange-traded funds and options, listed on an exchange other than the NASDAQ National Market System are valued at the latest quoted sales price of the exchange on which the security is primarily traded. Securities not traded on valuation date or securities not listed on an exchange are valued at the latest quoted bid price provided by the Fund’s pricing service. Securities listed on the NASDAQ National Market System are valued in accordance with the NASDAQ Official Closing Price.
Securities for which representative valuations or prices are not available from the Fund's pricing service may be valued at fair value. If trading or events occurring after the close of the principal market in which securities are traded are expected to materially affect the value of those securities, then they may be valued at their fair value, taking this trading or these events into account. Fair value is determined in good faith by the Advisor under procedures approved by and under the general supervision and responsibility of the Fund's Board of Directors (the “Board”).
Short-term investments that mature in sixty days or less are valued at amortized cost, which approximates market value. Investments in open-end investment companies are valued at their net asset value per share on valuation date, with the exception of exchange-traded funds as noted above.
Security Transactions, Investment Income and Expenses
Security transactions are accounted for on trade date. Dividend income is recorded on the ex-dividend date, except that if the ex-dividend date has passed, certain dividends from foreign securities are recorded as soon as the Fund is informed of the ex-dividend date. Non-cash dividends, if any, are recorded at the fair market value of the securities received. Interest income and expenses are recorded on an accrual basis.
Most expenses of the Fund can be attributed to a specific series. Expenses which cannot be directly attributed are apportioned among the series in the Fund in such a manner as deemed equitable by the Fund's Board, taking into consideration, among other things, the nature and type of expense.
12
Notes to Financial Statements
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Security Transactions, Investment Income and Expenses (continued)
Interest income, including amortization of premium and accretion of discounts using the effective interest method, is earned from settlement date and accrued daily.
The Series uses the identified cost method for determining realized gain or loss on investments for both financial statement and federal income tax reporting purposes.
Foreign Currency Translation
The books and records of the Series are maintained in U.S. dollars. Foreign currencies, investments and other assets and liabilities are translated into U.S. dollars at the current exchange rates. Purchases and sales of investment securities and income and expenses are translated on the respective dates of such transactions. The Series does not isolate realized and unrealized gains and losses attributable to changes in the exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized foreign currency gains and losses represent foreign currency gains and losses between trade date and settlement date on securities transactions, gains and losses on disposition of foreign currencies and the difference between the amount of income and foreign withholding taxes recorded on the books of the Series and the amounts actually received or paid.
Federal Taxes
The Series' policy is to comply with the provisions of the Internal Revenue Code applicable to regulated investment companies. The Series is not subject to federal income or excise tax to the extent that the Series distributes to shareholders each year its taxable income, including any net realized gains on investments, in accordance with requirements of the Internal Revenue Code. Accordingly, no provision for federal income tax or excise tax has been made in the financial statements.
Distributions of Income and Gains
Distributions to shareholders of net investment income and net realized gains are made annually. An additional distribution may be necessary to avoid taxation of the Series. Distributions are recorded on the ex-dividend date.
Indemnifications
The Fund’s organizational documents provide former and current directors and officers with a limited indemnification against liabilities arising in connection with the performance of their duties to the Fund. In the normal course of business, the Fund may also enter into contracts that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown as this would be dependent on future claims that may be made against the Fund. The risk of material loss from such claims is considered remote.
Other
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
13
Notes to Financial Statements
3. TRANSACTIONS WITH AFFILIATES
The Fund has an Investment Advisory Agreement (the “Agreement”) with the Advisor, for which the Series pays a fee, computed daily and payable monthly, at an annual rate of 1.00% of the Series’ average daily net assets.
Under the Agreement, personnel of the Advisor provide the Series with advice and assistance in the choice of investments and the execution of securities transactions, and otherwise maintain the Series’ organization. The Advisor also provides the Fund with necessary office space and fund administration and support services. The salaries of all officers of the Fund (except a percentage of the Fund’s Chief Compliance Officer’s salary, which is paid by the Fund, and the Special Assistant Secretary’s salary, which is paid by BISYS Fund Services Ohio, Inc. (“BISYS”)), and of all Directors who are "affiliated persons" of the Fund, or of the Advisor, and all personnel of the Fund, or of the Advisor, performing services relating to research, statistical and investment activities, are paid by the Advisor. Each "non-affiliated" Director receives an annual stipend, which is allocated among all the active series of the Fund. In addition, these Directors also receive a fee per Board meeting attended for each active series of the Fund plus a fee for each committee meeting attended.
The Advisor has contractually agreed, until at least April 30, 2008, to waive its fee and, if necessary, pay other operating expenses of the Series in order to maintain total expenses for the Series at no more than 1.20% of average daily net assets each year. For the year ended December 31, 2006, the Advisor did not waive its management fee or reimburse any expenses of the Series. The Advisor is not eligible to recoup any expenses that have been waived or reimbursed in prior years.
Manning & Napier Investor Services, Inc., a registered broker-dealer affiliate of the Advisor, acts as distributor for the Fund's shares. The services of Manning & Napier Investor Services, Inc. are provided at no additional cost to the Series.
For fund accounting and transfer agent services, through October 31, 2006, the Fund paid the Advisor an annual fee of 0.12% of the Fund’s average daily net assets up to $900 million, 0.09% of the Fund’s average daily net assets between $900 million and $1.5 billion, and 0.05% of the Fund’s average daily net assets over $1.5 billion. Effective November 1, 2006, the fee rates were reduced as follows: 0.11% of the Fund’s average daily net assets up to $900 million, 0.07% of the Fund’s average daily net assets between $900 million and $1.5 billion, and 0.04% of the Fund’s average daily net assets over $1.5 billion. Additionally, certain transaction and account-based fees and out-of-pocket expenses, including charges for reporting relating to the Fund’s compliance program, are charged. Expenses not directly attributable to a series are allocated based on each series’ relative net assets or number of accounts, depending on the expense. The Advisor has an agreement with BISYS under which BISYS serves as sub-accounting services and sub-transfer agent.
4. PURCHASES AND SALES OF SECURITIES
For the year ended December 31, 2006, purchases and sales of securities, other than United States Government securities and short-term securities, were $123,350,456 and $106,800,299, respectively. There were no purchases or sales of United States Government securities.
14
Notes to Financial Statements
5. CAPITAL STOCK TRANSACTIONS
Transactions in shares of Technology Series were:
| | For the Year | For the Year |
| | Ended 12/31/06 | Ended 12/31/05 |
| | Shares | Amount | Shares | Amount |
| Sold | 3,714,032 | $34,727,879 | 6,199,719 | $45,218,344 |
| Repurchased | (863,035) | (8,095,783) | (716,929) | (5,706,548) |
| Total | 2,850,997 | $26,632,096 | 5,482,790 | $39,511,796 |
Substantially all of the Series’ shares represent investments by fiduciary accounts over which the Advisor has sole investment discretion.
6. FINANCIAL INSTRUMENTS
The Series may trade in financial instruments with off-balance sheet risk in the normal course of its investing activities to assist in managing exposure to various market risks. These financial instruments include written options, forward foreign currency exchange contracts and futures contracts and may involve, to a varying degree, elements of risk in excess of the amounts recognized for financial statement purposes. No such investments were held by the Series on December 31, 2006.
7. FOREIGN SECURITIES
Investing in securities of foreign companies and foreign governments involves special risks and considerations not typically associated with investing in securities of domestic companies and the United States Government. These risks include revaluation of currencies and future adverse political and economic developments. Moreover, securities of foreign companies and foreign governments and their markets may be less liquid and their prices more volatile than those of comparable domestic companies and the United States Government.
8. TECHNOLOGY SECURITIES
The Series may focus its investments in certain related technology industries; hence, the Series may subject itself to a greater degree of risk than a series that is more diversified.
9. FEDERAL INCOME TAX INFORMATION
The amount and characterization of certain income and capital gains to be distributed are determined in accordance with federal income tax regulations, which may differ from accounting principles generally accepted in the United States of America. These differences are primarily due to differing book and tax treatments in the timing of the recognition of net investment income or gains and losses, including net operating losses, foreign currency gains and losses and losses deferred due to wash sales. The Series may periodically make reclassifications among its capital accounts to reflect income and gains available for distribution (or available capital loss carryovers) under income tax regulations, without impacting the Series’ net asset value. Any such reclassifications are not reflected in the financial highlights.
15
Notes to Financial Statements
9. FEDERAL INCOME TAX INFORMATION (continued)
At December 31, 2006, the tax basis components of distributable earnings and the net unrealized appreciation based on identified cost for federal income tax purposes were as follows:
| Cost for federal income tax purposes | $151,592,563 |
| | |
| Unrealized appreciation | $17,685,955 |
| Unrealized depreciation | (2,168,400) |
| | |
| Net unrealized appreciation | $15,517,555 |
| Capital loss carryover | 10,360,989 |
The capital loss carryover, disclosed above, available to the extent allowed by tax law to offset future net capital gain, if any, will expire on December 31, 2010.
10. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement 109. FIN 48 supplements FASB Statement 109, Accounting for Income Taxes, by defining the confidence level that a tax position must meet in order to be recognized in the financial statements. FIN 48 provides guidance for how a fund should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the fund has taken or expects to take on a tax return. FIN 48 requires that the tax effects of a position be recognized only if it is “more likely than not” to be sustained based solely on its technical merits. Tax positions not deemed to meet the more likely than not threshold would be recorded as a tax benefit or expense in the current year. FIN 48 needs to be implemented no later than the first required financial statement reporting period for its fiscal year beginning after December 15, 2006 and is to be applied to all open tax years as of the effective date. At adoption, the financial statements must be adjusted to reflect only those tax positions that are more likely than not to be sustained as of the adoption date. Management of the Fund is currently evaluating the impact that FIN 48 will have on the Series’ financial statements.
In addition, in September 2006, FASB Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“FAS 157”) was issued, and is effective for fiscal years beginning after November 15, 2007. FAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosure about fair value measurements. The standard does not expand the use of fair value in any new circumstances, but provides clarification on acceptable fair value methods and applications. At this time, management is evaluating the implications of FAS 157, but it is not expected to materially impact the Series’ financial statements.
16
Report of Independent Registered Public Accounting Firm
To the Board of Directors of Manning & Napier Fund, Inc. and Shareholders of Technology Series:
In our opinion, the accompanying statement of assets and liabilities, including the investment portfolio, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the Technology Series (a series of Manning & Napier Fund, Inc., hereafter referred to as the "Series") at December 31, 2006, and the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Series’ management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Columbus, Ohio
February 9, 2007
17
Renewal of Investment Advisory Agreement (unaudited)
At the Manning & Napier Fund, Inc. (the “Fund”) Board of Directors’ (the “Board”) annual in-person meeting, held on November 16, 2006, the Investment Advisory Agreement (the “Agreement”) between the Fund and Manning & Napier Advisors, Inc. (the “Advisor”) was reviewed by the Board for renewal. In connection with the decision whether to renew the Agreement, a variety of material was prepared for and reviewed by the Board. In addition, at the meeting of the Board, representatives of the Advisor presented additional oral and written information to help the Board evaluate the Advisor’s performance under the Agreement over the previous year. The Board then deliberated on the renewal of the Agreement in light of the various material provided prior to and at the meeting.
In connection with its review and deliberations, the Board considered the following factors and reached a conclusion with respect to such factors.
| · | The Board considered the services provided by the Advisor under the Agreement including, among others: deciding what securities to purchase and sell for each Series; arranging for the purchase and sale of such securities by placing orders with broker-dealers; administering the affairs of the Fund (including the books and records of the Fund not maintained by third party service providers such as the custodian or sub-transfer agent); arranging for the insurance coverage for the Fund; and supervising the preparation of tax returns, SEC filings (including registration statements) and reports to shareholders for the Fund. The Board discussed the quality of these services with representatives from the Advisor and concluded that the Advisor was performing its services to the Fund required under the Agreement in a reasonable manner. |
| · | The Board considered the investment performance of the various Series of the Fund. The investment performance for each Series was reviewed on a cumulative basis since inception and on a one year basis. In addition, annualized peformance for the following time periods was considered: inception, three year, five year, ten year, and current market cycle. A market cycle includes periods of both rising and falling markets. Returns for established benchmark indices for each Series were provided for each time period. In addition, the Board considered at the meeting (and considers on a quarterly basis) a peer group performance analysis consisting of Morningstar universes of mutual funds with similar investment objectives. The Board discussed the performance with representatives from the Advisor and concluded that the investment performance of each of the Fund’s Series was reasonable based on the Fund’s actual performance and comparative performance, especially performance over the current market cycle. |
| · | The Board considered the costs of the Advisor’s services and the profits of the Advisor as they relate to the Advisor’s services to the Fund under the Agreement. In reviewing the Advisor’s costs and profits, the Board discussed the Advisor’s revenues generated from the Fund (on both an actual and adjusted basis) and its expenses associated with providing the services under the Agreement. In addition, the Board reviewed the Advisor’s expenses associated with Fund activities outside of the Agreement (such as expense reimbursements pursuant to expense caps and payments made by the Advisor to third party platforms on which shares of the Fund are available for purchase). It was noted by representatives of the Advisor that 6 of the 18 active Series of the Fund are currently experiencing expenses above the capped expense ratios. After discussing the above costs and profits, the Board concluded that the Advisor’s profitability relating to its services provided under the Agreement is reasonable. |
| · | The Board considered the fees and expenses of the various Series of the Fund. The Advisor presented the advisory fees and total expenses for each Series, including the advisory fee adjusted for any expense waivers or reimbursements (either contractual or voluntary) paid by the Advisor. The advisory fees and expense ratios of each Series were compared to an average (on both a mean and median basis) of similar funds as disclosed on the Morningstar database. Representatives of the Advisor discussed with the Board the levels of its advisory fee for each Series of the Fund and as compared to the median and mean advisory fees for similar funds as listed on Morningstar. Expense ratios for every Series, except the High Yield Bond Series, are currently below the median and mean for similar funds as listed on Morningstar. Based on their review of the information provided, the Board concluded that the fees and expenses of each Series of the Fund were reasonable on a comparative basis. |
18
Renewal of Investment Advisory Agreement (unaudited)
| · | The Board also considered the other benefits the Advisor derives from its relationship with the Fund. Such other benefits include certain research products provided by soft dollars. Given the level of soft dollar transactions involving the Fund, the Board concluded that these additional benefits to the Advisor were reasonable. |
| · | In addition to the factors described above, the Board considered the Advisor’s personnel, the Advisor’s investment strategies, the Advisor’s policies and procedures relating to compliance with personal securities transactions, and the Advisor’s reputation, expertise and resources in domestic and foreign financial markets. The Board concluded that these factors support the conclusion that the Advisor performs its services in a reasonable manner. |
| · | The Board did not consider economies of scale at this time because of the multiple uses of the Fund (for the Advisor’s discretionary investment account clients in addition to direct investors), the current profitability of the Advisor’s services to the Fund under the Agreement, and the overall size of the Fund complex. |
Based on the Board’s conclusions regarding the factors described above, the Board, including a majority of Directors that are “not interested” as defined in the Investment Company Act of 1940, approved the renewal of the Agreement for another year. In the course of their deliberations, the Directors did not identify any particular information that was all important or controlling.
19
Directors’ and Officers’ Information (unaudited)
The Statement of Additional Information provides additional information about the Fund's directors and officers and can be obtained without charge by calling 1-800-466-3863, at www.manningnapieradvisors.com, or on the EDGAR Database on the SEC Internet web site (http:\\www.sec.gov). The following chart shows certain information about the Fund's officers and directors, including their principal occupations during the last five years. Unless specific dates are provided, the individuals have held the listed positions for longer than five years.
INTERESTED DIRECTOR/OFFICER | |
| Name: | B. Reuben Auspitz* |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 59 |
| Current Position(s) Held with Fund: | Principal Executive Officer, President, Chairman & Director |
Term of Office1& Length of Time Served: | Indefinite - Director since 1984; Vice President 1984 - 2003; President since 2004; |
| | Principal Executive Officer since 2002 |
| Principal Occupation(s) During Past 5 Years: | Executive Vice President; Co-Executive Director; Executive Group Member**; Chief |
| | Compliance Officer since 2004 - Manning & Napier Advisors, Inc. President; Director - |
| | Manning & Napier Investor Services, Inc. Holds or has held one or more of |
| | the following titles for various subsidiaries and affiliates: President, Vice President, |
| | Director, Chairman, Treasurer, Chief Compliance Officer or Member. |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| | |
INDEPENDENT DIRECTORS | |
| Name: | Stephen B. Ashley |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 66 |
| Current Position(s) Held with Fund: | Director, Audit Committee Member, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1996 |
| Principal Occupation(s) During Past 5 Years: | Chairman, Director, President & Chief Executive Officer, |
| | The Ashley Group (property management and investment) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | Genesee Corp. |
| | The Ashley Group |
| | Fannie Mae |
| | |
| Name: | Peter L. Faber |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 68 |
| Current Position(s) Held with Fund: | Director, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1987 |
| Principal Occupation(s) During Past 5 Years: | Senior Counsel, McDermott, Will & Emery LLP (law firm) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | Partnership for New York City, Inc. |
| | New York Collegium |
| Name: | Harris H. Rusitzky |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 72 |
| Current Position(s) Held with Fund: | Director, Audit Committee Member, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1985 |
| Principal Occupation(s) During Past 5 Years: | President, The Greening Group (business consultants); Partner, The Restaurant Group |
| | (restaurants) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
20
Directors' and Officers' Information (unaudited)
OFFICERS | |
| Name: | Jeffrey S. Coons, Ph.D., CFA |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 43 |
| Current Position(s) Held with Fund: | Vice President |
Term of Office1& Length of Time Served: | Since 2004 |
| Principal Occupation(s) During Past 5 Years: | Co-Director of Research since 2002 & Executive Group Member**, |
| | Manning & Napier Advisors, Inc. Managing Director - Risk Management, Manning & |
| | Napier Advisors, Inc., 1993-2002. Holds one or more of the following titles for various |
| | subsidiaries and affiliates: President, Director, Treasurer or Senior Trust Officer. |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Christine Glavin |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 40 |
| Current Position(s) Held with Fund: | Principal Financial Officer, Chief Financial Officer |
Term of Office1& Length of Time Served: | Principal Financial Officer since 2002; Chief Financial Officer since 2001 |
| Principal Occupation(s) During Past 5 Years: | Fund Accounting Manager, Manning & Napier Advisors, Inc. |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Jodi L. Hedberg |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 39 |
| Current Position(s) Held with Fund: | Corporate Secretary, Chief Compliance Officer, Anti-Money Laundering Compliance |
| | Officer |
Term of Office1& Length of Time Served: | Corporate Secretary since 1997; Chief Compliance Officer since 2004 |
| Principal Occupation(s) During Past 5 Years: | Director of Compliance, Manning & Napier Advisors, Inc. and affiliates; Corporate |
| | Secretary, Manning & Napier Investor Services, Inc. since 2006 |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Alaina V. Metz |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 39 |
| Current Position(s) Held with Fund: | Special Assistant Secretary |
| Term of Office & Length of Time Served: | Indefinite - Since 2002 |
| Principal Occupation(s) During Past 5 Years: | Vice President, BISYS Fund Services Ohio, Inc. (mutual fund servicing company) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
*Interested Director, within the meaning of the Investment Company Act of 1940 by reason of his position with the Fund's investment advisor and distributor. Mr. Auspitz serves as the Executive Vice President and Director, Manning & Napier Advisors, Inc. and President and Director, Manning & Napier Investor Services, Inc., the Fund's distributor.
**The Executive Group performs the duties of the Office of the Chief Executive of Manning & Napier Advisors, Inc.
1The term of office for President, Vice President, Chief Financial Officer, and Corporate Secretary is one year and until their respective successors are chosen and qualified. All other officers' terms are indefinite.
21
Literature Requests (unaudited)
Proxy Voting Policies and Procedures
A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request:
By phone 1-800-466-3863
On the Securities and Exchange
Commission’s (SEC) web site http://www.sec.gov
Proxy Voting Record
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30th is available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
Quarterly Portfolio Holdings
The Series’ complete schedule of portfolio holdings for the 1st and 3rd quarters of each fiscal year are provided on Form N-Q, and are available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
The Series’ Form N-Q may be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
Prospectus and Statement of Additional Information (SAI)
The prospectus and SAI provide additional information about each Series, including charges, expenses and risks. These documents are available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
On the Advisor’s web site http://www.manningnapieradvisors.com
Additional information available at www.manningnapieradvisors.com
| 1. | Fund Holdings - Month-End |
| 2. | Fund Holdings - Quarter-End |
| 3. | Shareholder Report - Annual |
| 4. | Shareholder Report - Semi-Annual |
22
Manning & Napier Fund, Inc.
Small Cap Series
Annual Report
December 31, 2006
Management Discussion and Analysis (unaudited)
Dear Shareholders:
The Small Cap Series generated another strong annual return during 2006. Its total return of 18.06% outperformed the Standard & Poor’s (S&P) 500 Total Return Index and was just 31 basis points (i.e., 0.31%) behind the Russell 2000® Index. Also, and importantly, the Series has significantly outperformed both indices over the current market cycle, which began on April 1, 2000. The Series’ annualized return over the market cycle is nearly twice the annualized return posted by the Russell 2000® Index. Because a market cycle includes periods of both rising and falling markets, measuring performance over a full cycle provides more perspective than measurements over other time periods.
Energy remained a core investment theme in 2006, but its relative weight varied throughout the year. Early in 2006 we took profits, then mid to late year we increased the Series’ position in this industry, becoming overweight relative to the Russell 2000® Index’s holdings, by investing in value-added suppliers. We invest in companies that supply goods and services to the oil producers because they will receive the capital expenditures of the major integrated oil companies. Global oil demand remained robust and producers are earning high returns and have high levels of cash. Producers are investing to try to boost production but high depletion rates and geologic conditions, as well as political uncertainty in producing regions, are raising the cost of exploration and production and requiring increasingly value-added and technological solutions.
The Series’ holdings in Consumer Staples also contributed to its strong performance in 2006. In fact, the Consumer Staples sector had the highest absolute return of any sector in the Russell 2000® Index, although it represents a relatively low portion of the stocks in the Index. A number of individual securities in this sector performed well as the market began to appreciate the consistent earnings stream that many Consumer Staples companies offer.
We began building positions in the airline sector in 2004, and our investment proved successful in 2005 and again in 2006. Performance varied across the sector, but our basket approach served the Series well. The airlines benefited in late 2006 from declining fuel prices as well as strong demand. These stocks were purchased under our Hurdle Rate Strategy, which looks for strong companies within industries in which we expect to see favorable supply and demand dynamics, as low profitability forces capacity reductions, which in turn lead to pricing power for the remaining participants.
We increased our position in Financials stocks in 2006, but we remain underweight compared to the benchmark. We continue to try to take advantage of the consolidation trend in regional banking and also added to themes relative to money transfer and wealth management. The Financials sector of the Russell 2000® Index underperformed the Index as a whole for the year. The Series continues to be underweight in the real estate investment trust (REIT) sector relative to the Index, and this hurt relative performance as a very select group of real estate related equities performed exceptionally well.
The Utilities sector performed well in 2006, delivering one of the highest sector returns in the Russell 2000® Index. The Series had a strong overweight position in this sector going into 2006. During the year we took some profits, but we remain invested in companies with low-cost coal-based generating assets that our research indicates are well-positioned to benefit from increasing energy prices.
Health Care was another sector in which we increased the Series’ allocation in 2006. During the year we added to holdings in the health care information technology (HCIT) sub-sector (a sub-sector of health care providers & services). Other Health Care holdings participate in a host of themes including joint devices, contact lenses, instrumentation makers and producers of advanced analytics (e.g. rapid response testing capabilities).
We appreciate your business and wish you all the very best in the coming year.
Sincerely,
Manning & Napier Advisors, Inc.
1
Performance Update as of December 31, 2006 (unaudited)
| | Average Annual Total Returns |
| | As of December 31, 2006 |
| | | | | |
| | One | Five | Ten | Since |
| | Year | Year | Year | Inception1 |
Manning & Napier Fund, Inc. - Small Cap Series2 | 18.06% | 13.01% | 10.12% | 11.22% |
| | | | | |
Standard & Poor's (S&P) 500 Total Return Index3 | 15.78% | 6.18% | 8.42% | 10.86% |
| | | | | |
Russell 2000® Index3 | 18.37% | 11.39% | 9.44% | 11.46% |
The following graph compares the value of a $10,000 investment in the Manning & Napier Fund, Inc. - Small Cap Series for the ten years ended December 31, 2006 to the S&P 500 Total Return Index and the Russell 2000® Index.
Data for line graph to follow:
| | Manning & Napier Fund, Inc. | S&P 500 | |
| Date | Small Cap Series2 | Total Return Index | Russell 2000® Index |
| 12/31/96 | $10,000 | $10,000 | $10,000 |
| 12/31/97 | 11,220 | 13,335 | 12,236 |
| 12/31/98 | 9,696 | 17,147 | 11,925 |
| 12/31/99 | 10,653 | 20,754 | 14,460 |
| 12/31/00 | 11,657 | 18,865 | 14,023 |
| 12/31/01 | 14,227 | 16,624 | 14,371 |
| 12/31/02 | 11,788 | 12,952 | 11,428 |
| 12/31/03 | 16,246 | 16,664 | 16,828 |
| 12/31/04 | 19,463 | 18,476 | 19,912 |
| 12/31/05 | 22,209 | 19,382 | 20,819 |
| 12/31/06 | 26,220 | 22,441 | 24,643 |
1Performance numbers for the Series and Indices are calculated from April 30, 1992, the Series' current activation date.
2The Series' performance does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. The Series' performance is historical and may not be indicative of future results.
3The S&P 500 Total Return Index is an unmanaged capitalization-weighted measure of 500 widely held common stocks listed on the New York Stock Exchange, American Stock Exchange and the Over-the-Counter market. The Index returns assume daily reinvestment of dividends. The Russell 2000® Index is an unmanaged index that consists of 2,000 U.S. small-capitalization stocks. The Index returns are based on a market capitalization-weighted average of relative price changes of the component stocks plus dividends whose reinvestments are compounded daily. Both Indices' returns, unlike Series returns, do not reflect any fees or expenses.
2
Shareholder Expense Example (unaudited)
As a shareholder of the Series, you may incur two types of costs: (1) transaction costs, including potential wire charges on redemptions and (2) ongoing costs, including management fees and other Series expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Series and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (July 1, 2006 to December 31, 2006).
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Series’ actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Series’ actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid during the period. You may use this information to compare the ongoing costs of investing in the Series and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transaction costs, such as potential wire charges on redemptions. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transaction costs were included, your costs would have been higher.
| | Beginning | Ending | Expenses Paid |
| | Account Value | Account Value | During Period* |
| | 7/1/06 | 12/31/06 | 7/1/06-12/31/06 |
| Actual | $1,000.00 | $1,107.60 | $6.11 |
| Hypothetical | | | |
| (5% return before expenses) | $1,000.00 | $1,019.41 | $5.85 |
*Expenses are equal to the Series’ annualized expense ratio (for the six-month period) of 1.15%, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). Expenses are based on the most recent fiscal half year; therefore, the expense ratio stated above may differ from the expense ratio stated in the financial highlights, which is based on one-year data.
3
Portfolio Composition as of December 31, 2006 (unaudited)
Data for pie chart to follow:
Sector Allocation*
| Consumer Discretionary | 15.6% |
| Consumer Staples | 3.5% |
| Energy | 9.9% |
| Financials | 6.0% |
| Health Care | 20.1% |
| Industrials | 14.1% |
| Information Technology | 17.8% |
| Materials | 4.1% |
| Telecommunication Services | 1.0% |
| Utilities | 4.4% |
| Cash, short-term investments, and liabilities, less other assets | 3.5% |
1As a percentage of net assets.
Market Capitalization
| Average | $1,469 Million |
| Median | 1,030 Million |
| Weighted Average | 1,450 Million |
Top Ten Stock Holdings2
| Hydril Co. | 2.6% |
| Aquila, Inc. | 2.4% |
| JetBlue Airways Corp. | 2.4% |
| Build-A-Bear Workshop, Inc. | 2.3% |
| Wright Medical Group, Inc. | 2.2% |
| ECI Telecom Ltd. (Israel) | 2.1% |
| Take-Two Interactive Software, Inc. | 2.1% |
| The Cooper Companies, Inc. | 2.0% |
| Pride International, Inc. | 2.0% |
| Nelnet, Inc. - Class A | 1.9% |
2As a percentage of total investments.
4
Investment Portfolio - December 31, 2006
| | | Value |
| | Shares | (Note 2) |
| | | |
COMMON STOCKS - 96.5% | | |
| | | |
Consumer Discretionary - 15.6% | | |
Auto Components - 3.1% | | |
| Azure Dynamics Corp.* (Canada) (Note 8) | 1,938,000 | $1,313,166 |
| Superior Industries International, Inc. | 85,000 | 1,637,950 |
| Tenneco, Inc.* | 103,800 | 2,565,936 |
| | | 5,517,052 |
| | | |
Diversified Consumer Services - 2.6% | | |
| Corinthian Colleges, Inc.* | 128,000 | 1,744,640 |
| Universal Technical Institute, Inc.* | 126,000 | 2,798,460 |
| | | 4,543,100 |
| | | |
Internet & Catalog Retail - 0.8% | | |
| Audible, Inc.* | 173,000 | 1,371,890 |
| | | |
Leisure Equipment & Products - 0.9% | | |
| Callaway Golf Co. | 64,000 | 922,240 |
| K2, Inc.* | 48,000 | 633,120 |
| | | 1,555,360 |
| | | |
Media - 4.2% | | |
| Acme Communications, Inc.* | 396,000 | 1,987,920 |
| DreamWorks Animation SKG, Inc. - Class A* | 68,000 | 2,005,320 |
| Playboy Enterprises, Inc. - Class B* | 148,000 | 1,696,080 |
| Scholastic Corp.* | 49,000 | 1,756,160 |
| | | 7,445,480 |
| | | |
Specialty Retail - 4.0% | | |
| Build-A-Bear Workshop, Inc.* | 147,000 | 4,118,940 |
| Douglas Holding AG (Germany) (Note 8) | 29,000 | 1,501,234 |
| Tractor Supply Co.* | 30,500 | 1,363,655 |
| | | 6,983,829 |
Total Consumer Discretionary | | 27,416,711 |
| | | |
Consumer Staples - 3.5% | | |
Beverages - 1.2% | | |
| Hansen Natural Corp.* | 35,950 | 1,210,796 |
| National Beverage Corp. | 62,000 | 869,860 |
| | | 2,080,656 |
| | | |
Food & Staples Retailing - 1.5% | | |
| Pathmark Stores, Inc.* | 154,000 | 1,717,100 |
| Smart & Final, Inc.* | 46,700 | 882,630 |
| | | 2,599,730 |
The accompanying notes are an integral part of the financial statements.
5
Investment Portfolio - December 31, 2006
| | | Value |
| | Shares | (Note 2) |
| | | |
Consumer Staples (continued) | | |
Food Products - 0.8% | | |
| Lancaster Colony Corp. | 12,200 | $540,582 |
| Tootsie Roll Industries, Inc. | 29,664 | 970,013 |
| | | 1,510,595 |
Total Consumer Staples | | 6,190,981 |
| | | |
Energy - 9.9% | | |
Energy Equipment & Services - 6.5% | | |
| APL ASA* (Norway) (Note 8) | 198,000 | 1,953,947 |
| Hydril Co.* | 60,000 | 4,511,400 |
| National-Oilwell Varco, Inc.* | 24,500 | 1,498,910 |
| Pride International, Inc.* | 116,000 | 3,480,000 |
| | | 11,444,257 |
| | | |
Oil, Gas & Consumable Fuels - 3.4% | | |
| Evergreen Energy, Inc.* | 181,000 | 1,790,090 |
| Forest Oil Corp.* | 55,000 | 1,797,400 |
| Foundation Coal Holdings, Inc. | 44,490 | 1,413,002 |
| Mariner Energy, Inc.* | 44,511 | 872,416 |
| | | 5,872,908 |
Total Energy | | 17,317,165 |
| | | |
Financials - 6.0% | | |
Commercial Banks - 3.6% | | |
| Boston Private Financial Holdings, Inc. | 59,500 | 1,678,495 |
| Citizens & Northern Corp. | 24,418 | 537,191 |
| Croghan Bancshares, Inc. | 11,500 | 411,125 |
| National Bankshares, Inc. | 26,000 | 616,200 |
| Northrim BanCorp, Inc. | 18,165 | 483,189 |
| Potomac Bancshares, Inc. | 28,592 | 444,605 |
| Tower Bancorp, Inc. | 8,825 | 394,919 |
| Wilmington Trust Corp. | 41,430 | 1,747,103 |
| | | 6,312,827 |
| | | |
Consumer Finance - 1.9% | | |
| Nelnet, Inc. - Class A* | 121,990 | 3,337,646 |
| | | |
Real Estate Investment Trusts (REITS) - 0.5% | | |
| Equity Inns, Inc. | 56,000 | 893,760 |
Total Financials | | 10,544,233 |
| | | |
Health Care - 20.1% | | |
Biotechnology - 2.6% | | |
| Cepheid, Inc.* | 222,000 | 1,887,000 |
| Senomyx, Inc.* | 210,625 | 2,736,019 |
| | | 4,623,019 |
The accompanying notes are an integral part of the financial statements.
6
Investment Portfolio - December 31, 2006
| | | Value |
| | Shares | (Note 2) |
| | | |
Health Care (continued) | | |
Health Care Equipment & Supplies - 8.5% | | |
| The Cooper Companies, Inc. | 80,300 | $3,573,350 |
| Foxhollow Technologies, Inc.* | 99,260 | 2,142,031 |
| IntraLase Corp.* | 87,000 | 1,947,060 |
| Kyphon, Inc.* | 41,720 | 1,685,488 |
| OraSure Technologies, Inc.* | 198,000 | 1,635,480 |
| Wright Medical Group, Inc.* | 167,000 | 3,887,760 |
| | | 14,871,169 |
| | | |
Health Care Providers & Services - 3.5% | | |
| AMN Healthcare Services, Inc.* | 100,000 | 2,754,000 |
| Cross Country Healthcare, Inc.* | 152,000 | 3,316,640 |
| | | 6,070,640 |
| | | |
Health Care Technology - 3.6% | | |
| AMICAS, Inc.* | 628,000 | 1,846,320 |
| Eclipsys Corp.* | 101,380 | 2,084,373 |
| WebMD Health Corp. - Class A* | 60,000 | 2,401,200 |
| | | 6,331,893 |
| | | |
Life Sciences Tools & Services - 1.9% | | |
| Affymetrix, Inc.* | 68,300 | 1,574,998 |
| Caliper Life Sciences, Inc.* | 315,000 | 1,801,800 |
| | | 3,376,798 |
Total Health Care | | 35,273,519 |
| | | |
Industrials - 14.1% | | |
Aerospace & Defense - 1.6% | | |
| Hexcel Corp.* | 160,000 | 2,785,600 |
| | | |
Airlines - 5.2% | | |
| AirTran Holdings, Inc.* | 255,000 | 2,993,700 |
| AMR Corp.* | 31,000 | 937,130 |
| Continental Airlines, Inc. - Class B* | 24,000 | 990,000 |
| JetBlue Airways Corp.* | 297,000 | 4,217,400 |
| | | 9,138,230 |
| | | |
Commercial Services & Supplies - 0.9% | | |
| Covanta Holding Corp.* | 71,200 | 1,569,248 |
| | | |
Construction & Engineering - 1.1% | | |
| Quanta Services, Inc.* | 95,000 | 1,868,650 |
| | | |
| | | |
Electrical Equipment - 2.1% | | |
| Hubbell, Inc. - Class B | 33,000 | 1,491,930 |
| Hydrogenics Corp.* (Canada) (Note 8) | 601,110 | 763,410 |
| Plug Power, Inc.* | 390,050 | 1,517,294 |
| | | 3,772,634 |
The accompanying notes are an integral part of the financial statements.
7
Investment Portfolio - December 31, 2006
| | | Value |
| | Shares | (Note 2) |
| | | |
Industrials (continued) | | |
Machinery - 3.2% | | |
AGCO Corp.*1 | 64,000 | $1,980,160 |
| Bucyrus International, Inc. - Class A | 39,200 | 2,028,992 |
| Wabtec Corp. | 53,000 | 1,610,140 |
| | | 5,619,292 |
Total Industrials | | 24,753,654 |
| | | |
Information Technology - 17.8% | | |
Communications Equipment - 4.9% | | |
| Blue Coat Systems, Inc.* | 125,000 | 2,993,750 |
| ECI Telecom Ltd.* (Israel) (Note 8) | 435,000 | 3,767,100 |
| Plantronics, Inc. | 87,500 | 1,855,000 |
| | | 8,615,850 |
| | | |
Computers & Peripherals - 0.8% | | |
| Avid Technology, Inc.* | 38,000 | 1,415,880 |
| | | |
Electronic Equipment & Instruments - 2.2% | | |
| LoJack Corp.* | 165,810 | 2,832,035 |
| Mechanical Technology, Inc.* | 519,740 | 982,309 |
| | | 3,814,344 |
| | | |
IT Services - 2.8% | | |
| MoneyGram International, Inc. | 103,000 | 3,230,080 |
| RightNow Technologies, Inc.* | 95,300 | 1,641,066 |
| | | 4,871,146 |
| | | |
Semiconductors & Semiconductor Equipment - 1.8% | | |
| Cabot Microelectronics Corp.* | 95,000 | 3,224,300 |
| | | |
Software - 5.3% | | |
| Borland Software Corp.* | 537,000 | 2,921,280 |
| Take-Two Interactive Software, Inc.* | 203,000 | 3,605,280 |
| UbiSoft Entertainment S.A.* (France) (Note 8) | 83,080 | 2,803,949 |
| | | 9,330,509 |
Total Information Technology | | 31,272,029 |
| | | |
Materials - 4.1% | | |
Chemicals - 3.1% | | |
| Calgon Carbon Corp.* | 286,000 | 1,773,200 |
| Minerals Technologies, Inc. | 30,250 | 1,778,397 |
| The Scotts Miracle-Gro Co. - Class A | 35,300 | 1,823,245 |
| | | 5,374,842 |
| | | |
Paper & Forest Products - 1.0% | | |
| Louisiana-Pacific Corp. | 82,000 | 1,765,460 |
Total Materials | | 7,140,302 |
The accompanying notes are an integral part of the financial statements.
8
Investment Portfolio - December 31, 2006
| | | Value |
| | Shares | (Note 2) |
| | | |
Telecommunication Services - 1.0% | | |
Diversified Telecommunication Services - 1.0% | | |
| iPass, Inc.* | 301,000 | $1,769,880 |
| | | |
Utilities - 4.4% | | |
Electric Utilities - 2.0% | | |
| Allegheny Energy, Inc.* | 36,000 | 1,652,760 |
| Westar Energy, Inc. | 67,400 | 1,749,704 |
| | | 3,402,464 |
| | | |
Multi-Utilities - 2.4% | | |
| Aquila, Inc.* | 902,100 | 4,239,870 |
Total Utilities | | 7,642,334 |
| | | |
TOTAL COMMON STOCKS | | |
| (Identified Cost $148,586,562) | | 169,320,808 |
| | | |
SHORT-TERM INVESTMENTS - 3.6% | | |
| Dreyfus Treasury Cash Management - Institutional Shares | | |
| (Identified Cost $6,335,225) | 6,335,225 | 6,335,225 |
| | | |
TOTAL INVESTMENTS - 100.1% | | |
| (Identified Cost $154,921,787) | | 175,656,033 |
| | | |
LIABILITIES, LESS OTHER ASSETS - (0.1%) | | (164,741) |
| | | |
NET ASSETS - 100% | | $175,491,292 |
*Non-income producing security
1Security pledged as collateral for call option written.
Written Call Options Outstanding
| | Shares Subject | Value |
Common Stock/Expiration Date/Exercise Price | to Call | (Note 2) |
| AGCO Corp./January 2007/$30 | | |
| (premiums received $116,476) | 64,000 | $128,000 |
The accompanying notes are an integral part of the financial statements.
9
Statement of Assets and Liabilities
December 31, 2006
ASSETS: | |
| | |
| Investments, at value (identified cost $154,921,787) (Note 2) | $175,656,033 |
| Foreign currency, at value (cost $2) | 2 |
| Receivable for fund shares sold | 441,900 |
| Receivable for securities sold | 106,267 |
| Dividends receivable | 75,563 |
| Foreign tax reclaims receivable | 547 |
| | |
| TOTAL ASSETS | 176,280,312 |
| | |
LIABILITIES: | |
| | |
| Accrued management fees (Note 3) | 146,155 |
| Accrued fund accounting and transfer agent fees (Note 3) | 12,581 |
| Accrued Chief Compliance Officer service fees (Note 3) | 429 |
| Accrued directors' fees (Note 3) | 223 |
| Payable for securities purchased | 433,327 |
| Written options outstanding, at value (premiums received $116,476) (Note 5) | 128,000 |
| Payable for fund shares repurchased | 36,855 |
| Audit fees payable | 26,899 |
| Other payables and accrued expenses | 4,551 |
| | |
| TOTAL LIABILITIES | 789,020 |
| | |
TOTAL NET ASSETS | $175,491,292 |
| | |
NET ASSETS CONSIST OF: | |
| | |
| Capital stock | $134,168 |
| Additional paid-in-capital | 153,385,889 |
| Accumulated net realized gain on investments, foreign currency, and other assets and liabilities | 1,248,488 |
| Net unrealized appreciation on investments, foreign currency, and other assets and liabilities | 20,722,747 |
| | |
TOTAL NET ASSETS | $175,491,292 |
| | |
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE - CLASS A ($175,491,292/13,416,788 shares) | $13.08 |
The accompanying notes are an integral part of the financial statements.
10
For the Year Ended December 31, 2006
INVESTMENT INCOME: | |
| | |
| Dividends (net of foreign tax withheld, $10,178) | $950,873 |
| Interest | 264,290 |
| | |
| Total Investment Income | 1,215,163 |
| | |
EXPENSES: | |
| | |
| Management fees (Note 3) | 1,604,988 |
| Fund accounting and transfer agent fees (Note 3) | 146,111 |
| Directors' fees (Note 3) | 7,100 |
| Chief Compliance Officer service fees (Note 3) | 6,195 |
| Custodian fees | 13,000 |
| Miscellaneous | 79,154 |
| | |
| Total Expenses | 1,856,548 |
| | |
| NET INVESTMENT LOSS | (641,385) |
| | |
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: | |
| | |
| Net realized gain on - | |
| Investments | 35,004,632 |
| Foreign currency and other assets and liabilities | 366 |
| | 35,004,998 |
| | |
| Net change in unrealized appreciation on - | |
| Investments | (5,973,562) |
| Written options | 310,789 |
| Foreign currency and other assets and liabilities | 122 |
| | (5,662,651) |
| | |
| NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS | 29,342,347 |
| | |
| NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS | $28,700,962 |
The accompanying notes are an integral part of the financial statements.
11
Statements of Changes in Net Assets
| | For the | For the |
| | Year Ended | Year Ended |
| | 12/31/06 | 12/31/05 |
INCREASE (DECREASE) IN NET ASSETS: | | |
| | | |
OPERATIONS: | | |
| | | |
| Net investment loss | $(641,385) | $(827,819) |
| Net realized gain on investments and foreign currency | 35,004,998 | 29,193,403 |
| Net change in unrealized appreciation on investments, written options and foreign currency | (5,662,651) | (7,237,580) |
| | | |
| Net increase from operations | 28,700,962 | 21,128,004 |
| | | |
DISTRIBUTIONS TO SHAREHOLDERS (Note 9): | | |
| | | |
| From net realized gain on investments | (33,448,452) | (33,255,433) |
| | | |
CAPITAL STOCK ISSUED AND REPURCHASED: | | |
| | | |
| Net increase (decrease) from capital share transactions (Note 6) | 25,822,755 | (2,894,053) |
| | | |
| Net increase (decrease) in net assets | 21,075,265 | (15,021,482) |
| | | |
NET ASSETS: | | |
| | | |
| Beginning of year | 154,416,027 | 169,437,509 |
| | | |
End of year (including undistributed net investment loss of $0 and $0, respectively) | $175,491,292 | $154,416,027 |
The accompanying notes are an integral part of the financial statements.
12
| | For the Years Ended |
| | 12/31/06 | 12/31/05 | 12/31/04 | 12/31/03 | 12/31/02 |
Per share data (for a share outstanding | | | | | |
throughout each year): | | | | | |
| | | | | | |
Net asset value - Beginning of year | $13.66 | $15.01 | $13.12 | $9.52 | $11.49 |
| | | | | | |
| Income (loss) from investment operations: | | | | | |
| Net investment loss | (0.05) | (0.07) | (0.07) | (0.04) | (0.03) |
| Net realized and unrealized gain (loss) on investments | 2.55 | 2.20 | 2.66 | 3.64 | (1.94) |
| | | | | | |
| Total from investment operations | 2.50 | 2.13 | 2.59 | 3.60 | (1.97) |
| | | | | | |
| Less distributions to shareholders: | | | | | |
| From net realized gain on investments | (3.08) | (3.48) | (0.70) | - | - |
| | | | | | |
Net asset value - End of year | $13.08 | $13.66 | $15.01 | $13.12 | $9.52 |
| | | | | | |
Total return1 | 18.06% | 14.11% | 19.81% | 37.82% | (17.15%) |
| | | | | | |
Ratios (to average net assets)/Supplemental Data: | | | | | |
| Expenses* | 1.16% | 1.19% | 1.22% | 1.22% | 1.24% |
| Net investment loss | (0.40%) | (0.51%) | (0.54%) | (0.39%) | (0.28%) |
| | | | | | |
| Portfolio turnover | 85% | 55% | 61% | 42% | 70% |
| | | | | | |
Net assets - End of year (000's omitted) | $175,491 | $154,416 | $169,438 | $139,909 | $95,772 |
*The investment advisor did not impose all of its management fee in some years. If these expenses had been incurred by the Series, the expense ratio (to average net assets) would have been increased as follows:
1Represents aggregate total return for the year indicated, and assumes reinvestment of all distributions. Total return would have been lower had certain expenses not been waived during certain years.
The accompanying notes are an integral part of the financial statements.
13
Notes to Financial Statements
1. ORGANIZATION
Small Cap Series (the "Series") is a no-load diversified series of Manning & Napier Fund, Inc. (the "Fund"), formerly Exeter Fund, Inc. The Fund is organized in Maryland and is registered under the Investment Company Act of 1940 (the “1940 Act”), as amended, as an open-end management investment company.
The Series' investment objective is to provide long-term growth by investing principally in the common stocks of companies with small market capitalizations.
The Series is authorized to issue five classes of shares (Class A, B, C, D and E). Currently, only Class A shares have been issued. Each class of shares is substantially the same, except that class-specific distribution and shareholder servicing expenses are borne by the specific class of shares to which they relate.
The Fund’s Advisor is Manning & Napier Advisors, Inc. (the “Advisor”). Shares of the Series are offered to investors, clients and employees of the Advisor and its affiliates. The total authorized capital stock of the Fund consists of 1.7 billion shares of common stock each having a par value of $0.01. As of December 31, 2006, 1.16 billion shares have been designated in total among 21 series, of which 37.5 million have been designated as Small Cap Series Class A common stock.
2. SIGNIFICANT ACCOUNTING POLICIES
Security Valuation
Portfolio securities, including domestic equities, foreign equities, exchange-traded funds and options, listed on an exchange other than the NASDAQ National Market System are valued at the latest quoted sales price of the exchange on which the security is primarily traded. Securities not traded on valuation date or securities not listed on an exchange are valued at the latest quoted bid price provided by the Fund's pricing service. Securities listed on the NASDAQ National Market System are valued in accordance with the NASDAQ Official Closing Price.
Securities for which representative valuations or prices are not available from the Fund's pricing service may be valued at fair value. If trading or events occurring after the close of the principal market in which securities are traded are expected to materially affect the value of those securities, then they may be valued at their fair value, taking this trading or these events into account. Fair value is determined in good faith by the Advisor under procedures approved by and under the general supervision and responsibility of the Fund's Board of Directors (the “Board”).
Short-term investments that mature in sixty days or less are valued at amortized cost, which approximates market value. Investments in open-end investment companies are valued at their net asset value per share on valuation date, with the exception of exchange-traded funds as noted above.
Security Transactions, Investment Income and Expenses
Security transactions are accounted for on trade date. Dividend income is recorded on the ex-dividend date, except that if the ex-dividend date has passed, certain dividends from foreign securities are recorded as soon as the Fund is informed of the ex-dividend date. Non-cash dividends, if any, are recorded at the fair market value of the securities received. Interest income and expenses are recorded on an accrual basis.
14
Notes to Financial Statements
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Security Transactions, Investment Income and Expenses (continued)
Most expenses of the Fund can be attributed to a specific series. Expenses which cannot be directly attributed are apportioned among the series in the Fund in such a manner as deemed equitable by the Fund's Board, taking into consideration, among other things, the nature and type of expense.
Interest income, including amortization of premium and accretion of discounts using the effective interest method, is earned from settlement date and accrued daily.
The Series uses the identified cost method for determining realized gain or loss on investments for both financial statement and federal income tax reporting purposes.
Foreign Currency Translation
The books and records of the Series are maintained in U.S. dollars. Foreign currencies, investments and other assets and liabilities are translated into U.S. dollars at the current exchange rates. Purchases and sales of investment securities and income and expenses are translated on the respective dates of such transactions. The Series does not isolate realized and unrealized gains and losses attributable to changes in the exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized foreign currency gains and losses represent foreign currency gains and losses between trade date and settlement date on securities transactions, gains and losses on disposition of foreign currencies and the difference between the amount of income and foreign withholding taxes recorded on the books of the Series and the amounts actually received or paid.
Option Contracts
The Series may write (sell) or buy call or put options on securities and other financial instruments. When the Series writes a call, the Series gives the purchaser the right to buy the underlying security from the Series at the price specified in the option contract (the “exercise price”) at any time during the option period. When the Series writes a put option, the Series gives the purchaser the right to sell to the Series the underlying security at the exercise price at any time during the option period. The Series will only write options on a “covered basis.” This means that the Series will own the underlying security when the Series writes a call or the Series will put aside cash, U.S. Government securities, or other liquid assets in an amount not less than the exercise price at all times the put option is outstanding.
When the Series writes an option, an amount equal to the premium received is reflected as a liability and is subsequently marked-to-market to reflect the current market value of the option. The Series, as a writer of an option, has no control over whether the underlying security or financial instrument may be sold (call) or purchased (put) and, as a result, bears the market risk of an unfavorable change in the price of the security or financial instrument underlying the written option. There is a risk that the Series may not be able to enter into a closing transaction because of an illiquid market.
The Series may also purchase options in an attempt to hedge against fluctuations in the value of its portfolio and to protect against declines in the value of the securities. The premium paid by the Series for the purchase of an option is reflected as an investment and subsequently marked-to-market to reflect the current market value of the option. The risk associated with purchasing options is limited to the premium paid.
15
Notes to Financial Statements
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Option Contracts (continued)
When a security is purchased or sold through an exercise of an option, the related premium paid (or received) is added to (or deducted from) the basis of the security acquired or deducted from (or added to) the proceeds of the security sold. When an option expires (or the Series enters into a closing transaction), the Series realizes a gain or loss on the option to the extent of the premium received or paid (or gain or loss to the extent the cost of the closing transaction exceeds the premium paid or received).
The measurement of the risks associated with option contracts is meaningful only when all related and offsetting transactions are considered.
Federal Taxes
The Series' policy is to comply with the provisions of the Internal Revenue Code applicable to regulated investment companies. The Series is not subject to federal income or excise tax to the extent that the Series distributes to shareholders each year its taxable income, including any net realized gains on investments, in accordance with requirements of the Internal Revenue Code. Accordingly, no provision for federal income tax or excise tax has been made in the financial statements.
Distributions of Income and Gains
Distributions to shareholders of net investment income and net realized gains are made annually. An additional distribution may be necessary to avoid taxation of the Series. Distributions are recorded on the ex-dividend date.
Indemnifications
The Fund’s organizational documents provide former and current directors and officers with a limited indemnification against liabilities arising in connection with the performance of their duties to the Fund. In the normal course of business, the Fund may also enter into contracts that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown as this would be dependent on future claims that may be made against the Fund. The risk of material loss from such claims is considered remote.
Other
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
3. TRANSACTIONS WITH AFFILIATES
The Fund has an Investment Advisory Agreement (the “Agreement”) with the Advisor, for which the Series pays a fee, computed daily and payable monthly, at an annual rate of 1.00% of the Series’ average daily net assets.
Under the Agreement, personnel of the Advisor provide the Series with advice and assistance in the choice of investments and the execution of securities transactions, and otherwise maintain the Series’ organization. The Advisor also provides the Fund with necessary office space and fund administration and support services. The salaries of all officers of the Fund (except a percentage of the Fund’s Chief Compliance Officer’s salary, which is paid by the Fund, and the Special Assistant Secretary’s salary, which is paid by BISYS Fund Services Ohio, Inc.
16
Notes to Financial Statements
3. TRANSACTIONS WITH AFFILIATES (continued)
(“BISYS”)), and of all Directors who are "affiliated persons" of the Fund, or of the Advisor, and all personnel of the Fund, or of the Advisor, performing services relating to research, statistical and investment activities, are paid by the Advisor. Each "non-affiliated" Director receives an annual stipend, which is allocated among all the active series of the Fund. In addition, these Directors also receive a fee per Board meeting attended for each active series of the Fund plus a fee for each committee meeting attended.
The Advisor has voluntarily agreed, during the current fiscal year, to waive its fee and, if necessary, pay other operating expenses of the Series in order to maintain total expenses for the Class A Series at no more than 1.22% of average daily net assets each year. For the year ended December 31, 2006, the Advisor did not waive its management fee or reimburse any expenses of the Series. The Advisor is not eligible to recoup any expenses that have been waived or reimbursed in prior years.
Manning & Napier Investor Services, Inc., a registered broker-dealer affiliate of the Advisor, acts as distributor for the Fund's shares. The services of Manning & Napier Investor Services, Inc. are provided at no additional cost to the Series.
For fund accounting and transfer agent services, through October 31, 2006, the Fund paid the Advisor an annual fee of 0.12% of the Fund’s average daily net assets up to $900 million, 0.09% of the Fund’s average daily net assets between $900 million and $1.5 billion, and 0.05% of the Fund’s average daily net assets over $1.5 billion. Effective November 1, 2006, the fee rates were reduced as follows: 0.11% of the Fund’s average daily net assets up to $900 million, 0.07% of the Fund’s average daily net assets between $900 million and $1.5 billion, and 0.04% of the Fund’s average daily net assets over $1.5 billion. Additionally, certain transaction and account-based fees and out-of-pocket expenses, including charges for reporting relating to the Fund’s compliance program, are charged. Expenses not directly attributable to a series are allocated based on each series’ relative net assets or number of accounts, depending on the expense. The Advisor has an agreement with BISYS under which BISYS serves as sub-accounting services and sub-transfer agent.
4. PURCHASES AND SALES OF SECURITIES
For the year ended December 31, 2006, purchases and sales of securities, other than United States Government securities and short-term securities, were $129,056,335 and $137,948,466, respectively. There were no purchases or sales of United States Government securities.
An employee of The BISYS Group, Inc. serves as an officer of the Fund. Therefore, The BISYS Group, Inc. is considered an “affiliated company”, as defined in the 1940 Act. The following transactions were effected in shares of The BISYS Group, Inc. for the year ended December 31, 2006:
Purchases | Sales | |
Shares | Cost | Shares | Proceeds | Realized Gain | Income |
| - | $- | 99,000 | $1,529,434 | $86,489 | $- |
As of December 31, 2006, the Series did not hold any shares of affiliated companies.
17
Notes to Financial Statements
5. OPTIONS WRITTEN
A summary of obligations for written option contracts for the year ended December 31, 2006 is as follows:
| | Put Options | Call Options |
| | Number of Contracts | Premiums Received | Number of Contracts | Premiums Received |
| Balance at December 31, 2005 | - | $- | 1,700 | $575,688 |
| Options entered into during 2006 | - | - | 640 | 116,476 |
| Options exercised during 2006 | - | - | (1,700) | (575,688) |
| Balance at December 31, 2006 | - | $- | 640 | $116,476 |
6. CAPITAL STOCK TRANSACTIONS
Transactions in Class A shares of Small Cap Series were:
| | For the Year | For the Year |
| | Ended 12/31/06 | Ended 12/31/05 |
| | | | | |
| | Shares | Amount | Shares | Amount |
| | | | | |
| Sold | 2,333,662 | $34,715,820 | 1,301,583 | $19,749,527 |
| Reinvested | 2,454,854 | 32,569,872 | 2,297,202 | 32,506,715 |
| Repurchased | (2,677,271) | (41,462,937) | (3,581,248) | (55,150,295) |
| Total | 2,111,245 | $25,822,755 | 17,537 | $(2,894,053) |
Approximately 80% of the Series’ shares represent investments by fiduciary accounts over which the Advisor has sole investment discretion.
7. FINANCIAL INSTRUMENTS
The Series may trade in financial instruments with off-balance sheet risk in the normal course of its investing activities to assist in managing exposure to various market risks. These financial instruments include written options, forward foreign currency exchange contracts and futures contracts and may involve, to a varying degree, elements of risk in excess of the amounts recognized for financial statement purposes. No such investments were held by the Series on December 31, 2006 other than those referred to in Note 5.
8. FOREIGN SECURITIES
Investing in securities of foreign companies and foreign governments involves special risks and considerations not typically associated with investing in securities of domestic companies and the United States Government. These risks include revaluation of currencies and future adverse political and economic developments. Moreover, securities of foreign companies and foreign governments and their markets may be less liquid and their prices more volatile than those of comparable domestic companies and the United States Government.
18
Notes to Financial Statements
9. FEDERAL INCOME TAX INFORMATION
The amount and characterization of certain income and capital gains to be distributed are determined in accordance with federal income tax regulations, which may differ from accounting principles generally accepted in the United States of America. These differences are primarily due to differing book and tax treatments in the timing of the recognition of net investment income or gains and losses, including net operating losses, the tax practice known as equalization and foreign currency gains and losses. The Series may periodically make reclassifications among its capital accounts to reflect income and gains available for distribution (or available capital loss carryovers) under income tax regulations, without impacting the Series' net asset value. Any such reclassifications are not reflected in the financial highlights.
The tax character of distributions paid were as follows:
| | For the Year | For the Year |
| | Ended 12/31/06 | Ended 12/31/05 |
| | | |
| Ordinary income | $5,103,422 | $6,173,310 |
| Long-term capital gains | 28,345,030 | 27,272,123 |
Pursuant to Section 852 of the Internal Revenue Code, as amended, the Series hereby designates $28,495,030 as capital gains for its taxable year ended December 31, 2006.
At December 31, 2006, the tax basis components of distributable earnings and the net unrealized appreciation based on identified cost for federal income tax purposes were as follows:
| Cost for federal income tax purposes | $154,805,311 |
| | |
| Unrealized appreciation | $27,474,182 |
| Unrealized depreciation | (6,751,460) |
| | |
| Net unrealized appreciation | $20,722,722 |
| Undistributed ordinary income | 127,760 |
| Undistributed long-term capital gains | 1,120,728 |
10. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement 109. FIN 48 supplements FASB Statement 109, Accounting for Income Taxes, by defining the confidence level that a tax position must meet in order to be recognized in the financial statements. FIN 48 provides guidance for how a fund should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the fund has taken or expects to take on a tax return. FIN 48 requires that the tax effects of a position be recognized only if it is “more likely than not” to be sustained based solely on its technical merits. Tax positions not deemed to meet the more likely than not threshold would be recorded as a tax benefit or expense in the current year. FIN 48 needs to be implemented no later than the first required financial statement reporting period for its fiscal year beginning after December 15, 2006 and is to be applied to all open tax years as of the effective date. At adoption, the financial statements must be adjusted to reflect only those tax positions that are more likely than not to be sustained as of the adoption date. Management of the Fund is currently evaluating the impact that FIN 48 will have on the Series’ financial statements.
19
Notes to Financial Statements
10. RECENT ACCOUNTING PRONOUNCEMENTS (continued)
In addition, in September 2006, FASB Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“FAS 157”) was issued, and is effective for fiscal years beginning after November 15, 2007. FAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosure about fair value measurements. The standard does not expand the use of fair value in any new circumstances, but provides clarification on acceptable fair value methods and applications. At this time, management is evaluating the implications of FAS 157, but it is not expected to materially impact the Series’ financial statements.
20
Report of Independent Registered Public Accounting Firm
To the Board of Directors of Manning & Napier Fund, Inc. and Shareholders of Small Cap Series:
In our opinion, the accompanying statement of assets and liabilities, including the investment portfolio, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the Small Cap Series (a series of Manning & Napier Fund, Inc., hereafter referred to as the "Series") at December 31, 2006, and the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Series’ management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Columbus, Ohio
February 9, 2007
21
Supplemental Tax Information (unaudited)
For federal income tax purposes, the Series designates for the current fiscal year $661,213 or, if different, the maximum amount allowable under the tax law as qualified dividend income.
22
Renewal of Investment Advisory Agreement (unaudited)
At the Manning & Napier Fund, Inc. (the “Fund”) Board of Directors’ (the “Board”) annual in-person meeting, held on November 16, 2006, the Investment Advisory Agreement (the “Agreement”) between the Fund and Manning & Napier Advisors, Inc. (the “Advisor”) was reviewed by the Board for renewal. In connection with the decision whether to renew the Agreement, a variety of material was prepared for and reviewed by the Board. In addition, at the meeting of the Board, representatives of the Advisor presented additional oral and written information to help the Board evaluate the Advisor’s performance under the Agreement over the previous year. The Board then deliberated on the renewal of the Agreement in light of the various material provided prior to and at the meeting.
In connection with its review and deliberations, the Board considered the following factors and reached a conclusion with respect to such factors.
| · | The Board considered the services provided by the Advisor under the Agreement including, among others: deciding what securities to purchase and sell for each Series; arranging for the purchase and sale of such securities by placing orders with broker-dealers; administering the affairs of the Fund (including the books and records of the Fund not maintained by third party service providers such as the custodian or sub-transfer agent); arranging for the insurance coverage for the Fund; and supervising the preparation of tax returns, SEC filings (including registration statements) and reports to shareholders for the Fund. The Board discussed the quality of these services with representatives from the Advisor and concluded that the Advisor was performing its services to the Fund required under the Agreement in a reasonable manner. |
| · | The Board considered the investment performance of the various Series of the Fund. The investment performance for each Series was reviewed on a cumulative basis since inception and on a one year basis. In addition, annualized peformance for the following time periods was considered: inception, three year, five year, ten year, and current market cycle. A market cycle includes periods of both rising and falling markets. Returns for established benchmark indices for each Series were provided for each time period. In addition, the Board considered at the meeting (and considers on a quarterly basis) a peer group performance analysis consisting of Morningstar universes of mutual funds with similar investment objectives. The Board discussed the performance with representatives from the Advisor and concluded that the investment performance of each of the Fund’s Series was reasonable based on the Fund’s actual performance and comparative performance, especially performance over the current market cycle. |
| · | The Board considered the costs of the Advisor’s services and the profits of the Advisor as they relate to the Advisor’s services to the Fund under the Agreement. In reviewing the Advisor’s costs and profits, the Board discussed the Advisor’s revenues generated from the Fund (on both an actual and adjusted basis) and its expenses associated with providing the services under the Agreement. In addition, the Board reviewed the Advisor’s expenses associated with Fund activities outside of the Agreement (such as expense reimbursements pursuant to expense caps and payments made by the Advisor to third party platforms on which shares of the Fund are available for purchase). It was noted by representatives of the Advisor that 6 of the 18 active Series of the Fund are currently experiencing expenses above the capped expense ratios. After discussing the above costs and profits, the Board concluded that the Advisor’s profitability relating to its services provided under the Agreement is reasonable. |
| · | The Board considered the fees and expenses of the various Series of the Fund. The Advisor presented the advisory fees and total expenses for each Series, including the advisory fee adjusted for any expense waivers or reimbursements (either contractual or voluntary) paid by the Advisor. The advisory fees and expense ratios of each Series were compared to an average (on both a mean and median basis) of similar funds as disclosed on the Morningstar database. Representatives of the Advisor discussed with the Board the levels of its advisory fee for each Series of the Fund and as compared to the median and mean advisory fees for similar funds as listed on Morningstar. Expense ratios for every Series, except the High Yield Bond Series, are currently below the median and mean for similar funds as listed on Morningstar. Based on their review of the information provided, the Board concluded that the fees and expenses of each Series of the Fund were reasonable on a comparative basis. |
23
Renewal of Investment Advisory Agreement (unaudited)
| · | The Board also considered the other benefits the Advisor derives from its relationship with the Fund. Such other benefits include certain research products provided by soft dollars. Given the level of soft dollar transactions involving the Fund, the Board concluded that these additional benefits to the Advisor were reasonable. |
| · | In addition to the factors described above, the Board considered the Advisor’s personnel, the Advisor’s investment strategies, the Advisor’s policies and procedures relating to compliance with personal securities transactions, and the Advisor’s reputation, expertise and resources in domestic and foreign financial markets. The Board concluded that these factors support the conclusion that the Advisor performs its services in a reasonable manner. |
| · | The Board did not consider economies of scale at this time because of the multiple uses of the Fund (for the Advisor’s discretionary investment account clients in addition to direct investors), the current profitability of the Advisor’s services to the Fund under the Agreement, and the overall size of the Fund complex. |
Based on the Board’s conclusions regarding the factors described above, the Board, including a majority of Directors that are “not interested” as defined in the Investment Company Act of 1940, approved the renewal of the Agreement for another year. In the course of their deliberations, the Directors did not identify any particular information that was all important or controlling.
24
Directors’ and Officers’ Information (unaudited)
The Statement of Additional Information provides additional information about the Fund's directors and officers and can be obtained without charge by calling 1-800-466-3863, at www.manningnapieradvisors.com, or on the EDGAR Database on the SEC Internet web site (http:\\www.sec.gov). The following chart shows certain information about the Fund's officers and directors, including their principal occupations during the last five years. Unless specific dates are provided, the individuals have held the listed positions for longer than five years.
INTERESTED DIRECTOR/OFFICER | |
| Name: | B. Reuben Auspitz* |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 59 |
| Current Position(s) Held with Fund: | Principal Executive Officer, President, Chairman & Director |
Term of Office1& Length of Time Served: | Indefinite - Director since 1984; Vice President 1984 - 2003; President since 2004; |
| | Principal Executive Officer since 2002 |
| Principal Occupation(s) During Past 5 Years: | Executive Vice President; Co-Executive Director; Executive Group Member**; Chief |
| | Compliance Officer since 2004 - Manning & Napier Advisors, Inc. President; Director - |
| | Manning & Napier Investor Services, Inc. Holds or has held one or more of |
| | the following titles for various subsidiaries and affiliates: President, Vice President, |
| | Director, Chairman, Treasurer, Chief Compliance Officer or Member. |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| | |
INDEPENDENT DIRECTORS | |
| Name: | Stephen B. Ashley |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 66 |
| Current Position(s) Held with Fund: | Director, Audit Committee Member, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1996 |
| Principal Occupation(s) During Past 5 Years: | Chairman, Director, President & Chief Executive Officer, |
| | The Ashley Group (property management and investment) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | Genesee Corp. |
| | The Ashley Group |
| | Fannie Mae |
| | |
| Name: | Peter L. Faber |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 68 |
| Current Position(s) Held with Fund: | Director, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1987 |
| Principal Occupation(s) During Past 5 Years: | Senior Counsel, McDermott, Will & Emery LLP (law firm) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | Partnership for New York City, Inc. |
| | New York Collegium |
| Name: | Harris H. Rusitzky |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 72 |
| Current Position(s) Held with Fund: | Director, Audit Committee Member, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1985 |
| Principal Occupation(s) During Past 5 Years: | President, The Greening Group (business consultants); Partner, The Restaurant Group |
| | (restaurants) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
25
Directors' and Officers' Information (unaudited)
OFFICERS | |
| Name: | Jeffrey S. Coons, Ph.D., CFA |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 43 |
| Current Position(s) Held with Fund: | Vice President |
Term of Office1& Length of Time Served: | Since 2004 |
| Principal Occupation(s) During Past 5 Years: | Co-Director of Research since 2002 & Executive Group Member**, |
| | Manning & Napier Advisors, Inc. Managing Director - Risk Management, Manning & |
| | Napier Advisors, Inc., 1993-2002. Holds one or more of the following titles for various |
| | subsidiaries and affiliates: President, Director, Treasurer or Senior Trust Officer. |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Christine Glavin |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 40 |
| Current Position(s) Held with Fund: | Principal Financial Officer, Chief Financial Officer |
Term of Office1& Length of Time Served: | Principal Financial Officer since 2002; Chief Financial Officer since 2001 |
| Principal Occupation(s) During Past 5 Years: | Fund Accounting Manager, Manning & Napier Advisors, Inc. |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Jodi L. Hedberg |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 39 |
| Current Position(s) Held with Fund: | Corporate Secretary, Chief Compliance Officer, Anti-Money Laundering Compliance |
| | Officer |
Term of Office1& Length of Time Served: | Corporate Secretary since 1997; Chief Compliance Officer since 2004 |
| Principal Occupation(s) During Past 5 Years: | Director of Compliance, Manning & Napier Advisors, Inc. and affiliates; Corporate |
| | Secretary, Manning & Napier Investor Services, Inc. since 2006 |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Alaina V. Metz |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 39 |
| Current Position(s) Held with Fund: | Special Assistant Secretary |
| Term of Office & Length of Time Served: | Indefinite - Since 2002 |
| Principal Occupation(s) During Past 5 Years: | Vice President, BISYS Fund Services Ohio, Inc. (mutual fund servicing company) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
*Interested Director, within the meaning of the Investment Company Act of 1940 by reason of his position with the Fund's investment advisor and distributor. Mr. Auspitz serves as the Executive Vice President and Director, Manning & Napier Advisors, Inc. and President and Director, Manning & Napier Investor Services, Inc., the Fund's distributor.
**The Executive Group performs the duties of the Office of the Chief Executive of Manning & Napier Advisors, Inc.
1The term of office for President, Vice President, Chief Financial Officer, and Corporate Secretary is one year and until their respective successors are chosen and qualified. All other officers' terms are indefinite.
26
Literature Requests (unaudited)
Proxy Voting Policies and Procedures
A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request:
By phone 1-800-466-3863
On the Securities and Exchange
Commission’s (SEC) web site http://www.sec.gov
Proxy Voting Record
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30th is available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
Quarterly Portfolio Holdings
The Series’ complete schedule of portfolio holdings for the 1st and 3rd quarters of each fiscal year are provided on Form N-Q, and are available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
The Series’ Form N-Q may be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
Prospectus and Statement of Additional Information (SAI)
The prospectus and SAI provide additional information about each Series, including charges, expenses and risks. These documents are available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
On the Advisor’s web site http://www.manningnapieradvisors.com
Additional information available at www.manningnapieradvisors.com
| 1. | Fund Holdings - Month-End |
| 2. | Fund Holdings - Quarter-End |
| 3. | Shareholder Report - Annual |
| 4. | Shareholder Report - Semi-Annual |
27
Manning & Napier Fund, Inc.
International Series
Annual Report
December 31, 2006
Management Discussion and Analysis (unaudited)
Dear Shareholders:
Global markets remained strong in 2006 continuing a four-year bull run. The International Series returned 21.96% for the 2006 calendar year. The Series outperformed the Standard & Poor’s (S&P) 500 Total Return Index, a measure of the performance of U.S. stocks, but the performance was below that of the Morgan Stanley Capital International (MSCI) All Country World Index ex U.S., which had a very strong year, returning 26.65%.
The Series’ underperformance relative to the international benchmark can be attributed to a number of factors, including strong performance from emerging countries in Asia and Latin America. However, it was more than that, as certain sectors in developed markets also performed well. Sector selection within countries became more important for the Series as stocks leveraged to global growth were the most significant drivers of the markets’ appreciation. We had limited holdings in emerging markets and kept fairly defensive holdings in developed markets, due to headwinds from a global slowdown instigated by rising global interest rates around the world including the U.S., United Kingdom, Europe, and Japan. The high level of liquidity the past few years helped push the spread between emerging bonds and U.S. bonds to an all time low, which implies investors see little risk in these markets. A reduction of the liquidity or even the fear of that outcome would be a very negative development for holdings tied to growth.
The International Series remains predominantly invested in Western Europe, based on evidence of efforts by Western European countries to remove burdens on the corporate sector, such as strict labor laws and high taxes, to regain competitiveness lost to lower labor-cost countries such as Eastern Europe and Asia. Western Europe, and Germany in particular, has initiated a fair amount of reform over the last few years, but much more needs to be done. However, in 2006, new reform measures slowed in order to ‘digest’ previous measures, and because stronger growth and corporate profits led to increased resistance from the labor sector. In Germany, at the end of 2006 growth remained strong and consumer confidence was at recent year highs, which will make the headwinds easier to bear.
Late in 2006, the Series reduced its holdings in Germany, due to the upcoming Value Added Tax (VAT) increase, but also to lock in gains earned during the “good” times. The VAT was scheduled to rise from 16% to 19% on January 1, 2007, and its effects are already being felt as purchases of big ticket items were pushed forward into December. The holdings sold also were those more sensitive to the economic cycle. With some of the proceeds from the sales, the Series increased defensive holdings in the UK and Switzerland. The Series also increased its position in France at the start of 2006 based on low valuations. France as a whole offered attractive valuations on a relative basis when the purchases were made, and even after strong performance for the year, valuations there remain attractive. Both our French and German holdings performed strongly over the course of the year, and were near benchmark performance.
We decreased our position in Japan in the second quarter. Japan was the weakest performer of the developed markets; therefore, our underweight relative to the benchmark helped performance. Although the Japanese recovery continues, its sustainability remains in question. Despite strong and growing corporate profits, the domestic consumer remains weak and hesitant to spend, and deflation has yet to be soundly beaten. In addition, continued overall economic growth is prompting the Bank of Japan to tighten monetary policy. Thus far, the Japanese monetary authorities have shown restraint from moving too quickly, with only one rate increase. However, the “normalization” of interest rates is the eventual goal of the government, and we believe it remains a risk if it’s done prematurely. In addition, the new Prime Minister remains an enigma. His rhetoric has been for continued reforms and fiscal austerity. He has thus far delivered on controlling public expenditures, but there are fears that he is returning the legislature to an “old guard” mentality of discussing reform at length in committees, but seeing only limited action. Despite the concerns, Japan has made a number of positive reforms over the last few years, such as postal privatization, cleaning up the banking sector, and improving competitiveness by loosening labor restrictions.
In the first half of the year we sold the Series’ holdings in India, Malaysia, Indonesia, and Korea. Although all were sold in part to reduce exposure to emerging markets, there were other reasons as well. In India, valuations appeared to be exorbitant. The Indonesian banks, purchased in 2005, were sold once investor fears over the inflation scare caused by an ending of fuel subsidies and the massive rate hikes that took place to combat it subsided. We sold the South Korean
1
Management Discussion and Analysis (unaudited)
holdings because the government began increasing interest rates in response to expanding credit and fears of a housing bubble. South Korea’s government historically has had a tendency to be overly aggressive regarding monetary policy, causing huge cyclical swings, which added to our concerns. Although we realized significant gains on all the stocks sold, all the markets except South Korea continued to perform strongly over the rest of the year.
The Series increased its holdings in Taiwan in 2006. Both relative and absolute valuations appear low, and investor concern remains elevated over tensions with Mainland China. We believe the market has overreacted to these fears because it is in the best interests of both countries to improve ties from an economic standpoint. In addition, Taiwan’s leader, a culprit in instigating the tensions, may be losing favor even within his own party. Accordingly, despite our caution about investments in emerging markets, we believe Taiwan remains attractive. Our Taiwanese holdings performed strongly for the year, outperforming the Taiwanese market as a whole.
We appreciate your business and wish you all the very best in the coming year.
Sincerely,
Manning & Napier Advisors, Inc.
2
Performance Update as of December 31, 2006 (unaudited)
| | Average Annual Total Returns |
| | As of December 31, 2006 |
| | | | | |
| | One | Five | Ten | Since |
| | Year | Year | Year | Inception1 |
Manning & Napier Fund, Inc. - International Series2 | 21.96% | 14.78% | 11.95% | 11.05% |
| | | | | |
Standard & Poor's (S&P) 500 Total Return Index3 | 15.78% | 6.18% | 8.42% | 11.06% |
| | | | | |
Morgan Stanley Capital International (MSCI) All Country World Index ex U.S.3 | 26.65% | 16.42% | 8.29% | 9.25% |
The following graph compares the value of a $10,000 investment in the Manning & Napier Fund, Inc. - International Series for the ten years ended December 31, 2006 to the S&P 500 Total Return Index and the MSCI All Country World Index ex U.S.
Data for line graph to follow:
| Manning & Napier Fund, Inc. | S&P 500 | MSCI All Country |
| Date | International Series2 | Total Return Index | World Index ex U.S. |
| 12/31/96 | $10,000 | $10,000 | $10,000 |
| 12/31/97 | 12,770 | 13,335 | 10,204 |
| 12/31/98 | 15,788 | 17,147 | 11,676 |
| 12/31/99 | 20,120 | 20,754 | 15,252 |
| 12/31/00 | 19,511 | 18,865 | 12,917 |
| 12/31/01 | 15,514 | 16,624 | 10,368 |
| 12/31/02 | 13,296 | 12,952 | 8,818 |
| 12/31/03 | 18,893 | 16,664 | 12,418 |
| 12/31/04 | 22,231 | 18,476 | 15,015 |
| 12/31/05 | 25,341 | 19,382 | 17,510 |
| 12/31/06 | 30,907 | 22,441 | 22,177 |
1Performance numbers for the Series and the S&P 500 Total Return Index are calculated from August 27, 1992, the Series' inception date. Prior to 2001, the MSCI All Country World Index ex U.S. only published month-end numbers; therefore, performance numbers for the Index are calculated from August 31, 1992.
2The Series' performance does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. The Series' performance is historical and may not be indicative of future results.
3The S&P 500 Total Return Index is an unmanaged capitalization-weighted measure of 500 widely held common stocks listed on the New York Stock Exchange, American Stock Exchange and the Over-the-Counter market. The Index returns assume daily reinvestment of dividends. The MSCI All Country World Index ex U.S. is a free float-adjusted market capitalization weighted index that is designed to measure equity market performance in the global developed and emerging markets and consists of 47 developed and emerging market country indices outside the United States. The Index is denominated in U.S Dollars. The Index returns assume daily reinvestment of gross dividends (which do not account for foreign dividend taxation) prior to December 31, 1998, as net returns were not available. Subsequent to December 31, 1998, the Index returns assume daily reinvestment of net dividends (thus accounting for foreign dividend taxation). Both Indices' returns, unlike Series returns, do not reflect any fees or expenses.
3
Shareholder Expense Example (unaudited)
As a shareholder of the Series, you may incur two types of costs: (1) transaction costs, including potential wire charges on redemptions and (2) ongoing costs, including management fees and other Series expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Series and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (July 1, 2006 to December 31, 2006).
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Series’ actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Series’ actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid during the period. You may use this information to compare the ongoing costs of investing in the Series and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transaction costs, such as potential wire charges on redemptions. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transaction costs were included, your costs would have been higher.
| | Beginning | Ending | Expenses Paid |
| | Account Value | Account Value | During Period* |
| | 7/1/06 | 12/31/06 | 7/1/06-12/31/06 |
| Actual | $1,000.00 | $1,113.90 | $6.23 |
| Hypothetical | | | |
| (5% return before expenses) | $1,000.00 | $1,019.31 | $5.96 |
*Expenses are equal to the Series’ annualized expense ratio (for the six-month period) of 1.17%, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). Expenses are based on the most recent fiscal half year; therefore, the expense ratio stated above may differ from the expense ratio stated in the financial highlights, which is based on one-year data.
4
Portfolio Composition as of December 31, 2006 (unaudited)
Data for pie chart to follow:
Country Allocation1
| France | 13.5% |
| Germany | 20.5% |
| Italy | 6.3% |
| Japan | 9.6% |
| Netherlands | 2.7% |
| Portugal | 1.7% |
| Switzerland | 4.7% |
| Taiwan | 4.7% |
| United Kingdom | 23.2% |
Miscellaneous2 | 2.0% |
| Cash, short-term investments, and other assets, less liabilities | 11.1% |
1As a percentage of net assets.
2Miscellaneous
Norway (0.9%)
Poland (0.6%)
Spain (0.5%)
Sector Allocation3
| Consumer Discretionary | 6.9% |
| Consumer Staples | 17.4% |
| Energy | 5.9% |
| Financials | 28.5% |
| Health Care | 8.4% |
| Industrials | 4.7% |
| Information Technology | 4.3% |
| Materials | 3.3% |
| Telecommunication Services | 4.2% |
| Utilities | 5.3% |
| Cash, short-term investments, and other assets, less liabilities | 11.1% |
3As a percentage of net assets.
5
Investment Portfolio - December 31, 2006
| | | Value |
| | Shares | (Note 2) |
| | | |
COMMON STOCKS - 88.9% | | |
| | | |
Consumer Discretionary - 6.9% | | |
Media - 4.0% | | |
| Impresa S.A. (SGPS)* (Portugal) | 169,000 | $1,043,940 |
| Mediaset S.p.A. (Italy) | 175,000 | 2,076,541 |
| Reed Elsevier plc - ADR (United Kingdom) | 55,600 | 2,448,624 |
| Wolters Kluwer N.V. (Netherlands) | 105,037 | 3,020,942 |
| | | 8,590,047 |
| | | |
Multiline Retail - 1.3% | | |
| PPR (France) | 18,300 | 2,734,263 |
| | | |
Specialty Retail - 0.9% | | |
| KOMERI Co. Ltd. (Japan) | 67,000 | 1,959,492 |
| | | |
Textiles, Apparel & Luxury Goods - 0.7% | | |
| LVMH S.A. (Louis Vuitton Moet Hennessy) (France) | 14,920 | 1,574,455 |
Total Consumer Discretionary | | 14,858,257 |
| | | |
Consumer Staples - 17.4% | | |
Beverages - 3.6% | | |
| Diageo plc (United Kingdom) | 130,000 | 2,551,390 |
| Kirin Brewery Co. Ltd. (Japan) | 173,000 | 2,720,254 |
| Scottish & Newcastle plc (United Kingdom) | 229,000 | 2,508,330 |
| | | 7,779,974 |
| | | |
Food & Staples Retailing - 3.6% | | |
| Carrefour S.A. (France) | 38,832 | 2,354,635 |
| President Chain Store Corp. (Taiwan) | 495,000 | 1,195,718 |
| Tesco plc (United Kingdom) | 533,000 | 4,220,801 |
| | | 7,771,154 |
| | | |
Food Products - 7.0% | | |
| Cadbury Schweppes plc (United Kingdom) | 358,000 | 3,830,208 |
| Groupe Danone (France) | 15,976 | 2,420,766 |
| Nestle S.A. (Switzerland) | 8,400 | 2,985,962 |
| Suedzucker AG (Germany) | 72,400 | 1,738,257 |
| Unilever plc - ADR (United Kingdom) | 148,000 | 4,117,360 |
| | | 15,092,553 |
| | | |
Household Products - 1.9% | | |
| Kao Corp. (Japan) | 47,000 | 1,267,922 |
| Reckitt Benckiser plc (United Kingdom) | 62,500 | 2,855,814 |
| | | 4,123,736 |
| | | |
Personal Products - 1.3% | | |
| Clarins S.A. (France) | 35,777 | 2,708,197 |
Total Consumer Staples | | 37,475,614 |
The accompanying notes are an integral part of the financial statements.
6
Investment Portfolio - December 31, 2006
| | | Value |
| | Shares | (Note 2) |
| | | |
Energy - 5.9% | | |
Oil, Gas & Consumable Fuels - 5.9% | | |
| BP plc (United Kingdom) | 205,000 | $2,277,555 |
| Eni S.p.A. (Italy) | 143,154 | 4,814,440 |
| Royal Dutch Shell plc - Class B (United Kingdom) | 70,500 | 2,470,536 |
| Total S.A. (France) | 45,160 | 3,257,519 |
Total Energy | | 12,820,050 |
| | | |
Financials - 28.5% | | |
Capital Markets - 2.8% | | |
| Daiwa Securities Group, Inc. (Japan) | 79,000 | 886,335 |
| Deutsche Bank AG (Germany) | 30,000 | 4,022,280 |
| Nomura Holdings, Inc. (Japan) | 63,000 | 1,188,629 |
| | | 6,097,244 |
| | | |
Commercial Banks - 17.8% | | |
| Aareal Bank AG* (Germany) | 92,000 | 4,279,239 |
| Banca Monte dei Paschi di Siena S.p.A. (Italy) | 181,000 | 1,171,221 |
| Bank Handlowy w Warszawie S.A. (Poland) | 24,000 | 718,370 |
| Barclays plc (United Kingdom) | 221,000 | 3,158,379 |
| BNP Paribas (France) | 26,000 | 2,836,345 |
| The Chugoku Bank Ltd. (Japan) | 137,000 | 1,798,420 |
| Commerzbank AG (Germany) | 62,500 | 2,371,705 |
| Credit Agricole S.A. (France) | 57,900 | 2,434,822 |
| The Hachijuni Bank Ltd. (Japan) | 244,000 | 1,597,412 |
| HSBC Holdings plc (United Kingdom) | 153,000 | 2,788,626 |
| Mitsubishi UFJ Financial Group, Inc. (Japan) | 170 | 2,100,177 |
| Royal Bank of Scotland Group plc (United Kingdom) | 82,700 | 3,226,725 |
| SanPaolo IMI S.p.A. (Italy) (now known as Intesa Sanpaolo) | 51,300 | 1,191,716 |
| Societe Generale (France) | 11,312 | 1,920,097 |
| The Sumitomo Trust & Banking Co. Ltd. (Japan) | 247,000 | 2,590,604 |
| UniCredito Italiano S.p.A. (Italy) | 489,000 | 4,285,680 |
| | | 38,469,538 |
| | | |
Diversified Financial Services - 1.4% | | |
| ING Groep N.V. (Netherlands) | 65,395 | 2,899,328 |
| | | |
Insurance - 6.5% | | |
| Allianz SE (Germany) | 32,620 | 6,669,699 |
| Axa (France) | 44,892 | 1,817,296 |
| Muenchener Rueckver AG (Germany) | 32,400 | 5,602,207 |
| | | 14,089,202 |
Total Financials | | 61,555,312 |
| | | |
Health Care - 8.4% | | |
Health Care Equipment & Supplies - 0.5% | | |
| Straumann Holding AG (Switzerland) | 4,580 | 1,109,186 |
The accompanying notes are an integral part of the financial statements.
7
Investment Portfolio - December 31, 2006
| | | Value |
| | Shares | (Note 2) |
| | | |
Health Care (continued) | | |
Pharmaceuticals - 7.9% | | |
| AstraZeneca plc (United Kingdom) | 22,300 | $1,197,948 |
| AstraZeneca plc - ADR (United Kingdom) | 37,000 | 1,981,350 |
| GlaxoSmithKline plc (United Kingdom) | 138,000 | 3,631,010 |
| Novartis AG - ADR (Switzerland) | 49,000 | 2,814,560 |
| Sanofi-Aventis (France) | 21,083 | 1,946,538 |
| Shire plc (United Kingdom) | 170,000 | 3,524,471 |
| Takeda Pharmaceutical Co. Ltd. (Japan) | 28,000 | 1,922,515 |
| | | 17,018,392 |
Total Health Care | | 18,127,578 |
| | | |
Industrials - 4.7% | | |
Airlines - 2.1% | | |
| Deutsche Lufthansa AG (Germany) | 164,800 | 4,530,950 |
| | | |
Commercial Services & Supplies - 0.5% | | |
| Taiwan Secom Co. Ltd. (Taiwan) | 627,210 | 1,133,906 |
| | | |
Electrical Equipment - 0.8% | | |
| Teco Electric & Machinery Co. Ltd. (Taiwan) | 3,280,000 | 1,671,209 |
| | | |
Industrial Conglomerates - 0.6% | | |
| Sonae S.A. (SGPS) (Portugal) | 669,100 | 1,333,555 |
| | | |
Machinery - 0.7% | | |
| FANUC Ltd. (Japan) | 15,500 | 1,526,683 |
Total Industrials | | 10,196,303 |
| | | |
Information Technology - 4.3% | | |
Communications Equipment - 0.6% | | |
| D-Link Corp. (Taiwan) | 946,000 | 1,239,847 |
| | | |
Electronic Equipment & Instruments - 1.1% | | |
| KEYENCE Corp. (Japan) | 4,950 | 1,226,788 |
| Yageo Corp.* (Taiwan) | 2,690,000 | 1,255,003 |
| | | 2,481,791 |
| | | |
Semiconductors & Semiconductor Equipment - 1.1% | | |
| Taiwan Semiconductor Manufacturing Co. Ltd. - ADR (Taiwan) | 216,297 | 2,364,126 |
| | | |
Software - 1.5% | | |
| SAP AG (Germany) | 61,400 | 3,269,242 |
Total Information Technology | | 9,355,006 |
| | | |
Materials - 3.3% | | |
Chemicals - 2.7% | | |
| Arkema* (France) | 1,129 | 58,012 |
| Bayer AG (Germany) | 107,350 | 5,785,278 |
| | | 5,843,290 |
The accompanying notes are an integral part of the financial statements.
8
Investment Portfolio - December 31, 2006
| | Shares/ | Value |
| | Principal Amount | (Note 2) |
| | | |
Materials (continued) | | |
Construction Materials - 0.6% | | |
| Taiwan Cement Corp. (Taiwan) | 1,488,901 | $1,345,860 |
Total Materials | | 7,189,150 |
| | | |
Telecommunication Services - 4.2% | | |
Diversified Telecommunication Services - 4.2% | | |
| France Telecom S.A. - ADR (France) | 31,000 | 858,700 |
| Portugal Telecom S.A. (SGPS) - ADR (Portugal) | 94,250 | 1,219,595 |
| Swisscom AG - ADR (Switzerland) | 85,000 | 3,209,600 |
| Telefonica S.A. - ADR (Spain) | 18,250 | 1,163,438 |
| Telekomunikacja Polska S.A. (Poland) | 64,000 | 541,812 |
| Telenor ASA - ADR (Norway) | 36,250 | 2,045,588 |
Total Telecommunication Services | | 9,038,733 |
| | | |
Utilities - 5.3% | | |
Electric Utilities - 2.7% | | |
| E.ON AG (Germany) | 43,737 | 5,962,798 |
| | | |
Multi-Utilities - 2.6% | | |
| National Grid plc (United Kingdom) | 229,000 | 3,304,092 |
| Suez S.A. (France) | 43,340 | 2,244,141 |
| | | 5,548,233 |
Total Utilities | | 11,511,031 |
| | | |
TOTAL COMMON STOCKS | | |
| (Identified Cost $127,147,194) | | 192,127,034 |
| | | |
SHORT-TERM INVESTMENTS - 10.1% | | |
| Dreyfus Treasury Cash Management - Institutional Shares | 6,779,439 | 6,779,439 |
| Fannie Mae Discount Note, 1/11/2007 | $15,000,000 | 14,973,600 |
| | | |
TOTAL SHORT-TERM INVESTMENTS | | |
| (Identified Cost $21,758,106) | | 21,753,039 |
| | | |
TOTAL INVESTMENTS - 99.0% | | |
| (Identified Cost $148,905,300) | | 213,880,073 |
| | | |
OTHER ASSETS, LESS LIABILITIES - 1.0% | | 2,100,615 |
| | | |
NET ASSETS - 100% | | $215,980,688 |
*Non-income producing security
ADR - American Depository Receipt
The Series' portfolio holds, as a percentage of net assets, greater than 10% in the following countries: United Kingdom - 23.2%; Germany - 20.5%; France - 13.5%.
The accompanying notes are an integral part of the financial statements.
9
Statement of Assets and Liabilities
December 31, 2006
ASSETS: | |
| | |
| Investments, at value (identified cost $148,905,300) (Note 2) | $213,880,073 |
| Foreign currency, at value (cost $219,032) | 220,072 |
| Cash | 59 |
| Receivable for fund shares sold | 1,961,119 |
| Dividends receivable | 145,213 |
| Foreign tax reclaims receivable | 139,868 |
| | |
| TOTAL ASSETS | 216,346,404 |
| | |
LIABILITIES: | |
| | |
| Accrued management fees (Note 3) | 176,160 |
| Accrued fund accounting and transfer agent fees (Note 3) | 14,587 |
| Accrued Chief Compliance Officer service fees (Note 3) | 429 |
| Accrued directors' fees (Note 3) | 223 |
| Payable for fund shares repurchased | 133,696 |
| Audit fees payable | 30,944 |
| Other payables and accrued expenses | 9,677 |
| | |
| TOTAL LIABILITIES | 365,716 |
| | |
TOTAL NET ASSETS | $215,980,688 |
| | |
NET ASSETS CONSIST OF: | |
| | |
| Capital stock | $219,473 |
| Additional paid-in-capital | 150,696,266 |
| Undistributed net investment income | 80,919 |
| Net unrealized appreciation on investments, foreign currency, and other assets and liabilities | 64,984,030 |
| | |
TOTAL NET ASSETS | $215,980,688 |
| | |
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE ($215,980,688/21,947,307 shares) | $9.84 |
The accompanying notes are an integral part of the financial statements.
10
For the Year Ended December 31, 2006
INVESTMENT INCOME: | |
| | |
| Dividends (net of foreign tax withheld, $603,485) | $4,367,929 |
| Interest | 680,800 |
| | |
| Total Investment Income | 5,048,729 |
| | |
EXPENSES: | |
| | |
| Management fees (Note 3) | 1,956,851 |
| Fund accounting and transfer agent fees (Note 3) | 174,738 |
| Directors' fees (Note 3) | 7,100 |
| Chief Compliance Officer service fees (Note 3) | 6,195 |
| Custodian fees | 93,050 |
| Miscellaneous | 80,718 |
| | |
| Total Expenses | 2,318,652 |
| | |
| NET INVESTMENT INCOME | 2,730,077 |
| | |
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: | |
| | |
| Net realized gain (loss) on - | |
| Investments (net of foreign capital gains tax, $44,669) (Note 2) | 35,152,592 |
| Foreign currency and other assets and liabilities | (63,436) |
| | 35,089,156 |
| | |
| Net change in unrealized appreciation on - | |
| Investments | 3,913,308 |
| Foreign currency and other assets and liabilities | 15,890 |
| | 3,929,198 |
| | |
| NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS | 39,018,354 |
| | |
| NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS | $41,748,431 |
The accompanying notes are an integral part of the financial statements.
11
Statements of Changes in Net Assets
| | For the | For the |
| | Year Ended | Year Ended |
| | 12/31/06 | 12/31/05 |
| | | |
INCREASE (DECREASE) IN NET ASSETS: | | |
| | | |
OPERATIONS: | | |
| | | |
| Net investment income | $2,730,077 | $1,853,731 |
| Net realized gain on investments and foreign currency | 35,089,156 | 16,455,889 |
| Net change in unrealized appreciation on investments and foreign currency | 3,929,198 | 4,582,655 |
| | | |
| Net increase from operations | 41,748,431 | 22,892,275 |
| | | |
DISTRIBUTIONS TO SHAREHOLDERS (Note 8): | | |
| | | |
| From net investment income | (2,592,847) | (1,903,150) |
| From net realized gain on investments | (36,732,750) | (14,732,499) |
| | | |
| Total distributions to shareholders | (39,325,597) | (16,635,649) |
| | | |
CAPITAL STOCK ISSUED AND REPURCHASED: | | |
| | | |
| Net increase from capital share transactions (Note 5) | 20,390,350 | 20,994,192 |
| | | |
| Net increase in net assets | 22,813,184 | 27,250,818 |
| | | |
NET ASSETS: | | |
| | | |
| Beginning of year | 193,167,504 | 165,916,686 |
| | | |
End of year (including undistributed net investment income and distributions in excess of net investment income of $80,919 and $(6,428), respectively) | $215,980,688 | $193,167,504 |
The accompanying notes are an integral part of the financial statements.
12
| | For the Years Ended |
| | 12/31/06 | 12/31/05 | 12/31/04 | 12/31/03 | 12/31/02 |
| | | | | | |
Per share data (for a share outstanding | | | | | |
throughout each year): | | | | | |
| | | | | | |
Net asset value - Beginning of year | $9.90 | $9.52 | $8.83 | $6.67 | $7.89 |
| | | | | | |
| Income (loss) from investment operations: | | | | | |
| Net investment income | 0.15 | 0.11 | 0.08 | 0.07 | 0.07 |
| Net realized and unrealized gain (loss) on investments | 2.01 | 1.21 | 1.44 | 2.72 | (1.20) |
| | | | | | |
| Total from investment operations | 2.16 | 1.32 | 1.52 | 2.79 | (1.13) |
| | | | | | |
| Less distributions to shareholders: | | | | | |
| From net investment income | (0.15) | (0.11) | (0.08) | (0.06) | (0.07) |
| From net realized gain on investments | (2.07) | (0.83) | (0.75) | (0.57) | (0.02) |
| | | | | | |
| Total distributions to shareholders | (2.22) | (0.94) | (0.83) | (0.63) | (0.09) |
| | | | | | |
Net asset value - End of year | 9.84 | $9.90 | $9.52 | $8.83 | $6.67 |
| | | | | | |
Total return1 | 21.96% | 13.99% | 17.67% | 42.10% | (14.30%) |
| | | | | | |
Ratios (to average net assets)/Supplemental Data: | | | | | |
| Expenses | 1.18% | 1.24% | 1.29% | 1.30%* | 1.32% |
| Net investment income | 1.39% | 1.10% | 0.86% | 0.94% | 0.96% |
| | | | | | |
| Portfolio turnover | 30% | 35% | 19% | 46% | 5% |
| | | | | | |
Net assets - End of year (000's omitted) | $215,981 | $193,168 | $165,917 | $129,479 | $80,945 |
*The investment advisor did not impose all of its management fee. If these expenses had been incurred by the Series, the expense ratio (to average net assets) for the year ended 12/31/03 would have been increased by 0.02%.
1Represents aggregate total return for the year indicated, and assumes reinvestment of all distributions. Total return would have been lower had certain expenses not been waived during the year ended 12/31/03.
The accompanying notes are an integral part of the financial statements.
13
Notes to Financial Statements
1. ORGANIZATION
International Series (the "Series") is a no-load diversified series of Manning & Napier Fund, Inc. (the “Fund”), formerly Exeter Fund, Inc. The Fund is organized in Maryland and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company.
The Series' investment objective is to provide long-term growth by investing principally in the common stocks of companies located outside the United States.
The Fund’s Advisor is Manning & Napier Advisors, Inc. (the “Advisor”). Shares of the Series are offered to investors, clients and employees of the Advisor and its affiliates. The Series resumed offering shares directly to investors on May 18, 2004, as it had done previously from time to time. The total authorized capital stock of the Fund consists of 1.7 billion shares of common stock each having a par value of $0.01. As of December 31, 2006, 1.16 billion shares have been designated in total among 21 series, of which 50 million have been designated as International Series Class A common stock.
2. SIGNIFICANT ACCOUNTING POLICIES
Security Valuation
Portfolio securities, including domestic equities, foreign equities, exchange-traded funds and options, listed on an exchange other than the NASDAQ National Market System are valued at the latest quoted sales price of the exchange on which the security is primarily traded. Securities not traded on valuation date or securities not listed on an exchange are valued at the latest quoted bid price provided by the Fund's pricing service. Securities listed on the NASDAQ National Market System are valued in accordance with the NASDAQ Official Closing Price.
Securities for which representative valuations or prices are not available from the Fund's pricing service may be valued at fair value. If trading or events occurring after the close of the principal market in which securities are traded are expected to materially affect the value of those securities, then they may be valued at their fair value, taking this trading or these events into account. Fair value is determined in good faith by the Advisor under procedures approved by and under the general supervision and responsibility of the Fund's Board of Directors (the “Board”).
Short-term investments that mature in sixty days or less are valued at amortized cost, which approximates market value. Investments in open-end investment companies are valued at their net asset value per share on valuation date, with the exception of exchange-traded funds as noted above.
Security Transactions, Investment Income and Expenses
Security transactions are accounted for on trade date. Dividend income is recorded on the ex-dividend date, except that if the ex-dividend date has passed, certain dividends from foreign securities are recorded as soon as the Fund is informed of the ex-dividend date. Non-cash dividends, if any, are recorded at the fair market value of the securities received. Interest income and expenses are recorded on an accrual basis.
Most expenses of the Fund can be attributed to a specific series. Expenses which cannot be directly attributed are apportioned among the series in the Fund in such a manner as deemed equitable by the Fund's Board, taking into consideration, among other things, the nature and type of expense.
14
Notes to Financial Statements
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Security Transactions, Investment Income and Expenses (continued)
Interest income, including amortization of premium and accretion of discounts using the effective interest method, is earned from settlement date and accrued daily.
The Series uses the identified cost method for determining realized gain or loss on investments for both financial statement and federal income tax reporting purposes.
Foreign Currency Translation
The books and records of the Series are maintained in U.S. dollars. Foreign currencies, investments and other assets and liabilities are translated into U.S. dollars at the current exchange rates. Purchases and sales of investment securities and income and expenses are translated on the respective dates of such transactions. The Series does not isolate realized and unrealized gains and losses attributable to changes in the exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized foreign currency gains and losses represent foreign currency gains and losses between trade date and settlement date on securities transactions, gains and losses on disposition of foreign currencies and the difference between the amount of income and foreign withholding taxes recorded on the books of the Series and the amounts actually received or paid.
Taxes
The Series' policy is to comply with the provisions of the Internal Revenue Code applicable to regulated investment companies. The Series is not subject to federal income or excise tax to the extent that the Series distributes to shareholders each year its taxable income, including any net realized gains on investments, in accordance with requirements of the Internal Revenue Code. Accordingly, no provision for federal income tax or excise tax has been made in the financial statements.
Additionally, based on the Fund’s understanding of the tax rules and rates related to income, gains and transactions for foreign jurisdictions in which it invests, the Series will provide for foreign taxes, and where appropriate, deferred foreign taxes.
Distributions of Income and Gains
Distributions to shareholders of net investment income and net realized gains are made annually. An additional distribution may be necessary to avoid taxation of the Series. Distributions are recorded on the ex-dividend date.
Indemnifications
The Fund’s organizational documents provide former and current directors and officers with a limited indemnification against liabilities arising in connection with the performance of their duties to the Fund. In the normal course of business, the Fund may also enter into contracts that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown as this would be dependent on future claims that may be made against the Fund. The risk of material loss from such claims is considered remote.
Other
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
15
Notes to Financial Statements
3.TRANSACTIONS WITH AFFILIATES
The Fund has an Investment Advisory Agreement (the “Agreement”) with the Advisor, for which the Series pays a fee, computed daily and payable monthly, at an annual rate of 1.00% of the Series’ average daily net assets.
Under the Agreement, personnel of the Advisor provide the Series with advice and assistance in the choice of investments and the execution of securities transactions, and otherwise maintain the Series’ organization. The Advisor also provides the Fund with necessary office space and fund administration and support services. The salaries of all officers of the Fund (except a percentage of the Fund’s Chief Compliance Officer’s salary, which is paid by the Fund, and the Special Assistant Secretary’s salary, which is paid by BISYS Fund Services Ohio, Inc. (“BISYS”)), and of all Directors who are "affiliated persons" of the Fund, or of the Advisor, and all personnel of the Fund, or of the Advisor, performing services relating to research, statistical and investment activities, are paid by the Advisor. Each "non-affiliated" Director receives an annual stipend, which is allocated among all the active series of the Fund. In addition, these Directors also receive a fee per Board meeting attended for each active series of the Fund plus a fee for each committee meeting attended.
The Advisor has voluntarily agreed, during the current fiscal year, to waive its fee and, if necessary, pay other operating expenses of the Series in order to maintain total expenses for the Series at no more than 1.30% of average daily net assets each year. For the year ended December 31, 2006, the Advisor did not waive its management fee or reimburse any expenses of the Series. The Advisor is not eligible to recoup any expenses that have been waived or reimbursed in prior years.
Manning & Napier Investor Services, Inc., a registered broker-dealer affiliate of the Advisor, acts as distributor for the Fund's shares. The services of Manning & Napier Investor Services, Inc. are provided at no additional cost to the Series.
For fund accounting and transfer agent services, through October 31, 2006, the Fund paid the Advisor an annual fee of 0.12% of the Fund’s average daily net assets up to $900 million, 0.09% of the Fund’s average daily net assets between $900 million and $1.5 billion, and 0.05% of the Fund’s average daily net assets over $1.5 billion. Effective November 1, 2006, the fee rates were reduced as follows: 0.11% of the Fund’s average daily net assets up to $900 million, 0.07% of the Fund’s average daily net assets between $900 million and $1.5 billion, and 0.04% of the Fund’s average daily net assets over $1.5 billion. Additionally, certain transaction and account-based fees and out-of-pocket expenses, including charges for reporting relating to the Fund’s compliance program, are charged. Expenses not directly attributable to a series are allocated based on each series’ relative net assets or number of accounts, depending on the expense. The Advisor has an agreement with BISYS under which BISYS serves as sub-accounting services and sub-transfer agent.
4. PURCHASES AND SALES OF SECURITIES
For the year ended December 31, 2006, purchases and sales of securities, other than United States Government securities and short-term securities, were $53,692,196 and $86,389,435, respectively. There were no purchases or sales of United States Government securities.
16
Notes to Financial Statements
5. CAPITAL STOCK TRANSACTIONS
Transactions in shares of International Series were:
| | For the Year | For the Year |
| | Ended 12/31/06 | Ended 12/31/05 |
| | Shares | Amount | Shares | Amount |
| Sold | 3,790,447 | $40,831,406 | 2,448,832 | $23,946,331 |
| Reinvested | 3,944,903 | 38,787,300 | 1,670,321 | 16,343,037 |
| Repurchased | (5,307,703) | (59,228,356) | (2,023,371) | (19,295,176) |
| Total | 2,427,647 | $20,390,350 | 2,095,782 | $20,994,192 |
Substantially all of the Series’ shares represent investments by fiduciary accounts over which the Advisor has sole investment discretion.
6. FINANCIAL INSTRUMENTS
The Series may trade in financial instruments with off-balance sheet risk in the normal course of its investing activities to assist in managing exposure to various market risks. These financial instruments include written options, forward foreign currency exchange contracts and futures contracts and may involve, to a varying degree, elements of risk in excess of the amounts recognized for financial statement purposes. No such investments were held by the Series on December 31, 2006.
7. FOREIGN SECURITIES
Investing in securities of foreign companies and foreign governments involves special risks and considerations not typically associated with investing in securities of domestic companies and the United States Government. These risks include revaluation of currencies and future adverse political and economic developments. Moreover, securities of foreign companies and foreign governments and their markets may be less liquid and their prices more volatile than those of comparable domestic companies and the United States Government.
8. FEDERAL INCOME TAX INFORMATION
The amount and characterization of certain income and capital gains to be distributed are determined in accordance with federal income tax regulations, which may differ from accounting principles generally accepted in the United States of America. These differences are primarily due to differing book and tax treatments in the timing of the recognition of net investment income or gains and losses, including foreign currency gains and losses and investments in passive foreign investment companies. The Series may periodically make reclassifications among its capital accounts to reflect income and gains available for distribution (or available capital loss carryovers) under income tax regulations, without impacting the Series’ net asset value. Any such reclassifications are not reflected in the financial highlights.
The tax character of distributions paid were as follows:
| | For the Year | For the Year |
| | Ended 12/31/06 | Ended 12/31/05 |
| | | |
| Ordinary income | $5,289,902 | $3,284,321 |
| Long-term capital gains | 34,035,695 | 13,351,328 |
17
Notes to Financial Statements
8. FEDERAL INCOME TAX INFORMATION (continued)
Pursuant to Section 852 of the Internal Revenue Code, as amended, the Series hereby designates the long-term capital gains disclosed previously as capital gains for its taxable year ended December 31, 2006.
At December 31, 2006, the tax basis components of distributable earnings and the net unrealized appreciation based on identified cost for federal income tax purposes were as follows:
| Cost for federal income tax purposes | $148,905,300 |
| | |
| Unrealized appreciation | $65,494,466 |
| Unrealized depreciation | (519,693) |
| | |
| Net unrealized appreciation | $64,974,773 |
| Undistributed ordinary income | 80,919 |
9. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement 109. FIN 48 supplements FASB Statement 109, Accounting for Income Taxes, by defining the confidence level that a tax position must meet in order to be recognized in the financial statements. FIN 48 provides guidance for how a fund should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the fund has taken or expects to take on a tax return. FIN 48 requires that the tax effects of a position be recognized only if it is “more likely than not” to be sustained based solely on its technical merits. Tax positions not deemed to meet the more likely than not threshold would be recorded as a tax benefit or expense in the current year. FIN 48 needs to be implemented no later tan the first required financial statement reporting period for its fiscal year beginning after December 15, 2006 and is to be applied to all open tax years as of the effective date. At adoption, the financial statements must be adjusted to reflect only those tax positions that are more likely than not to be sustained as of the adoption date. Management of the Fund is currently evaluating the impact that FIN 48 will have on the Series’ financial statements.
In addition, in September 2006, FASB Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“FAS 157”) was issued, and is effective for fiscal years beginning after November 15, 2007. FAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosure about fair value measurements. The standard does not expand the use of fair value in any new circumstances, but provides clarification on acceptable fair value methods and applications. At this time, management is evaluating the implications of FAS 157, but it is not expected to materially impact the Series’ financial statements.
18
Report of Independent Registered Public Accounting Firm
To the Board of Directors of Manning & Napier Fund, Inc. and Shareholders of International Series:
In our opinion, the accompanying statement of assets and liabilities, including the investment portfolio, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the International Series (a series of Manning & Napier Fund, Inc., hereafter referred to as the "Series") at December 31, 2006, and the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Series’ management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2006 by correspondence with the custodian, provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Columbus, Ohio
February 9, 2007
19
Supplemental Tax Information (unaudited)
For federal income tax purposes, the Series designates for the current fiscal year $3,910,294 or, if different, the maximum amount allowable under the tax law as qualified dividend income.
20
Renewal of Investment Advisory Agreement (unaudited)
At the Manning & Napier Fund, Inc. (the “Fund”) Board of Directors’ (the “Board”) annual in-person meeting, held on November 16, 2006, the Investment Advisory Agreement (the “Agreement”) between the Fund and Manning & Napier Advisors, Inc. (the “Advisor”) was reviewed by the Board for renewal. In connection with the decision whether to renew the Agreement, a variety of material was prepared for and reviewed by the Board. In addition, at the meeting of the Board, representatives of the Advisor presented additional oral and written information to help the Board evaluate the Advisor’s performance under the Agreement over the previous year. The Board then deliberated on the renewal of the Agreement in light of the various material provided prior to and at the meeting.
In connection with its review and deliberations, the Board considered the following factors and reached a conclusion with respect to such factors.
| · | The Board considered the services provided by the Advisor under the Agreement including, among others: deciding what securities to purchase and sell for each Series; arranging for the purchase and sale of such securities by placing orders with broker-dealers; administering the affairs of the Fund (including the books and records of the Fund not maintained by third party service providers such as the custodian or sub-transfer agent); arranging for the insurance coverage for the Fund; and supervising the preparation of tax returns, SEC filings (including registration statements) and reports to shareholders for the Fund. The Board discussed the quality of these services with representatives from the Advisor and concluded that the Advisor was performing its services to the Fund required under the Agreement in a reasonable manner. |
| · | The Board considered the investment performance of the various Series of the Fund. The investment performance for each Series was reviewed on a cumulative basis since inception and on a one year basis. In addition, annualized peformance for the following time periods was considered: inception, three year, five year, ten year, and current market cycle. A market cycle includes periods of both rising and falling markets. Returns for established benchmark indices for each Series were provided for each time period. In addition, the Board considered at the meeting (and considers on a quarterly basis) a peer group performance analysis consisting of Morningstar universes of mutual funds with similar investment objectives. The Board discussed the performance with representatives from the Advisor and concluded that the investment performance of each of the Fund’s Series was reasonable based on the Fund’s actual performance and comparative performance, especially performance over the current market cycle. |
| · | The Board considered the costs of the Advisor’s services and the profits of the Advisor as they relate to the Advisor’s services to the Fund under the Agreement. In reviewing the Advisor’s costs and profits, the Board discussed the Advisor’s revenues generated from the Fund (on both an actual and adjusted basis) and its expenses associated with providing the services under the Agreement. In addition, the Board reviewed the Advisor’s expenses associated with Fund activities outside of the Agreement (such as expense reimbursements pursuant to expense caps and payments made by the Advisor to third party platforms on which shares of the Fund are available for purchase). It was noted by representatives of the Advisor that 6 of the 18 active Series of the Fund are currently experiencing expenses above the capped expense ratios. After discussing the above costs and profits, the Board concluded that the Advisor’s profitability relating to its services provided under the Agreement is reasonable. |
| · | The Board considered the fees and expenses of the various Series of the Fund. The Advisor presented the advisory fees and total expenses for each Series, including the advisory fee adjusted for any expense waivers or reimbursements (either contractual or voluntary) paid by the Advisor. The advisory fees and expense ratios of each Series were compared to an average (on both a mean and median basis) of similar funds as disclosed on the Morningstar database. Representatives of the Advisor discussed with the Board the levels of its advisory fee for each Series of the Fund and as compared to the median and mean advisory fees for similar funds as listed on Morningstar. Expense ratios for every Series, except the High Yield Bond Series, are currently below the median and mean for similar funds as listed on Morningstar. Based on their review of the information provided, the Board concluded that the fees and expenses of each Series of the Fund were reasonable on a comparative basis. |
21
Renewal of Investment Advisory Agreement (unaudited)
| · | The Board also considered the other benefits the Advisor derives from its relationship with the Fund. Such other benefits include certain research products provided by soft dollars. Given the level of soft dollar transactions involving the Fund, the Board concluded that these additional benefits to the Advisor were reasonable. |
| · | In addition to the factors described above, the Board considered the Advisor’s personnel, the Advisor’s investment strategies, the Advisor’s policies and procedures relating to compliance with personal securities transactions, and the Advisor’s reputation, expertise and resources in domestic and foreign financial markets. The Board concluded that these factors support the conclusion that the Advisor performs its services in a reasonable manner. |
| · | The Board did not consider economies of scale at this time because of the multiple uses of the Fund (for the Advisor’s discretionary investment account clients in addition to direct investors), the current profitability of the Advisor’s services to the Fund under the Agreement, and the overall size of the Fund complex. |
Based on the Board’s conclusions regarding the factors described above, the Board, including a majority of Directors that are “not interested” as defined in the Investment Company Act of 1940, approved the renewal of the Agreement for another year. In the course of their deliberations, the Directors did not identify any particular information that was all important or controlling.
22
Directors’ and Officers’ Information (unaudited)
The Statement of Additional Information provides additional information about the Fund's directors and officers and can be obtained without charge by calling 1-800-466-3863, at www.manningnapieradvisors.com, or on the EDGAR Database on the SEC Internet web site (http:\\www.sec.gov). The following chart shows certain information about the Fund's officers and directors, including their principal occupations during the last five years. Unless specific dates are provided, the individuals have held the listed positions for longer than five years.
INTERESTED DIRECTOR/OFFICER | |
| Name: | B. Reuben Auspitz* |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 59 |
| Current Position(s) Held with Fund: | Principal Executive Officer, President, Chairman & Director |
Term of Office1& Length of Time Served: | Indefinite - Director since 1984; Vice President 1984 - 2003; President since 2004; |
| | Principal Executive Officer since 2002 |
| Principal Occupation(s) During Past 5 Years: | Executive Vice President; Co-Executive Director; Executive Group Member**; Chief |
| | Compliance Officer since 2004 - Manning & Napier Advisors, Inc. President; Director - |
| | Manning & Napier Investor Services, Inc. Holds or has held one or more of |
| | the following titles for various subsidiaries and affiliates: President, Vice President, |
| | Director, Chairman, Treasurer, Chief Compliance Officer or Member. |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| | |
INDEPENDENT DIRECTORS | |
| Name: | Stephen B. Ashley |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 66 |
| Current Position(s) Held with Fund: | Director, Audit Committee Member, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1996 |
| Principal Occupation(s) During Past 5 Years: | Chairman, Director, President & Chief Executive Officer, |
| | The Ashley Group (property management and investment) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | Genesee Corp. |
| | The Ashley Group |
| | Fannie Mae |
| | |
| Name: | Peter L. Faber |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 68 |
| Current Position(s) Held with Fund: | Director, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1987 |
| Principal Occupation(s) During Past 5 Years: | Senior Counsel, McDermott, Will & Emery LLP (law firm) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | Partnership for New York City, Inc. |
| | New York Collegium |
| Name: | Harris H. Rusitzky |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 72 |
| Current Position(s) Held with Fund: | Director, Audit Committee Member, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1985 |
| Principal Occupation(s) During Past 5 Years: | President, The Greening Group (business consultants); Partner, The Restaurant Group |
| | (restaurants) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
23
Directors' and Officers' Information (unaudited)
OFFICERS | |
| Name: | Jeffrey S. Coons, Ph.D., CFA |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 43 |
| Current Position(s) Held with Fund: | Vice President |
Term of Office1& Length of Time Served: | Since 2004 |
| Principal Occupation(s) During Past 5 Years: | Co-Director of Research since 2002 & Executive Group Member**, |
| | Manning & Napier Advisors, Inc. Managing Director - Risk Management, Manning & |
| | Napier Advisors, Inc., 1993-2002. Holds one or more of the following titles for various |
| | subsidiaries and affiliates: President, Director, Treasurer or Senior Trust Officer. |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Christine Glavin |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 40 |
| Current Position(s) Held with Fund: | Principal Financial Officer, Chief Financial Officer |
Term of Office1& Length of Time Served: | Principal Financial Officer since 2002; Chief Financial Officer since 2001 |
| Principal Occupation(s) During Past 5 Years: | Fund Accounting Manager, Manning & Napier Advisors, Inc. |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Jodi L. Hedberg |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 39 |
| Current Position(s) Held with Fund: | Corporate Secretary, Chief Compliance Officer, Anti-Money Laundering Compliance |
| | Officer |
Term of Office1& Length of Time Served: | Corporate Secretary since 1997; Chief Compliance Officer since 2004 |
| Principal Occupation(s) During Past 5 Years: | Director of Compliance, Manning & Napier Advisors, Inc. and affiliates; Corporate |
| | Secretary, Manning & Napier Investor Services, Inc. since 2006 |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Alaina V. Metz |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 39 |
| Current Position(s) Held with Fund: | Special Assistant Secretary |
| Term of Office & Length of Time Served: | Indefinite - Since 2002 |
| Principal Occupation(s) During Past 5 Years: | Vice President, BISYS Fund Services Ohio, Inc. (mutual fund servicing company) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
*Interested Director, within the meaning of the Investment Company Act of 1940 by reason of his position with the Fund's investment advisor and distributor. Mr. Auspitz serves as the Executive Vice President and Director, Manning & Napier Advisors, Inc. and President and Director, Manning & Napier Investor Services, Inc., the Fund's distributor.
**The Executive Group performs the duties of the Office of the Chief Executive of Manning & Napier Advisors, Inc.
1The term of office for President, Vice President, Chief Financial Officer, and Corporate Secretary is one year and until their respective successors are chosen and qualified. All other officers' terms are indefinite.
24
[THIS PAGE INTENTIONALLY LEFT BLANK]
25
Literature Requests (unaudited)
Proxy Voting Policies and Procedures
A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request:
By phone 1-800-466-3863
On the Securities and Exchange
Commission’s (SEC) web site http://www.sec.gov
Proxy Voting Record
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30th is available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
Quarterly Portfolio Holdings
The Series’ complete schedule of portfolio holdings for the 1st and 3rd quarters of each fiscal year are provided on Form N-Q, and are available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
The Series’ Form N-Q may be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
Prospectus and Statement of Additional Information (SAI)
The prospectus and SAI provide additional information about each Series, including charges, expenses and risks. These documents are available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
On the Advisor’s web site http://www.manningnapieradvisors.com
Additional information available at www.manningnapieradvisors.com
| 1. | Fund Holdings - Month-End |
| 2. | Fund Holdings - Quarter-End |
| 3. | Shareholder Report - Annual |
| 4. | Shareholder Report - Semi-Annual |
26
Manning & Napier Fund, Inc.
Financial Services Series
Annual Report
December 31, 2006
Management Discussion and Analysis (unaudited)
Dear Shareholders:
The Financial Services Series closed its first full calendar year with solid performance, beating both the Standard & Poor’s (S&P) 500 Total Return Index and S&P 500 Financials Index, and closing the gap on the S&P 500 Financials Index since the Series’ inception on July 1, 2005. For the year, the Series ended with a total return of 19.62% compared to 15.78% for the S&P 500 Total Return Index and 19.21% for the S&P 500 Financials Index.
The Financial sector’s performance over this time period was aided by the end of the interest rate increases instituted by the Federal Reserve Bank (the “Fed”). The Fed has so far decided to leave short-term rates unchanged at 5.25% since June 29th after 17 consecutive ¼ point increases.
The competitive relative performance versus the S&P 500 Financials Index was due to a combination of our sector weightings and our selection of stocks within each sector. The two main positive factors were our positions in the banking industry and in asset management and custody banks. These two segments experienced strong returns in the second half of the year. However, the Series’ relatively small positions in real estate investment trusts (REITs) and investment banks and brokers acted to hold down performance relative to the index as both segments experienced very strong returns.
We maintain our largest position in the banking sector as banks have been able to continue growing earnings through a difficult interest rate environment and consolidation continues. We continue to favor the large regional banks as well as the money-centers given their attractive valuations. Our focus has been on those banks that have been able to grow their fee-based revenue, but we have also found opportunities to increase exposure to more traditional banks as valuations became more attractive during 2006.
Another theme in the portfolio is the development of the high net worth marketplace and the potential for various participants in it. Over the last half of 2006, we added positions in companies that serve this market. These companies typically try to offer comprehensive platforms of different financial services, which enhances client retention and per client profitability. This sector has continued to enjoy strong growth as both improvements in wealth accumulation and demographics serve to benefit these companies.
A third area on which we have focused is the asset management and custody banks industry. Valuations became increasingly attractive in the second quarter of 2006 and provided an opportunity to increase holdings in these industries. With robust equity market performance, the industry has experienced a substantial increase in assets under management and improving equity fund flows. Accordingly, we have added companies that benefit from this trend along with companies that have the scale to increase margins as flows grow.
We appreciate your business and wish you all the very best in the coming year.
Sincerely,
Manning & Napier Advisors, Inc.
1
Performance Update as of December 31, 2006 (unaudited)
| | Average Annual Total Returns |
| | As of December 31, 2006 |
| | One | Since |
| | Year | Inception1 |
| | | |
Manning & Napier Fund, Inc. - Financial Services Series2 | 19.62% | 18.12% |
| | | |
Standard & Poor's (S&P) 500 Total Return Index3 | 15.78% | 14.41% |
| | | |
Standard & Poor's (S&P) 500 Financials Index3 | 19.21% | 19.03% |
The following graph compares the value of a $10,000 investment in the Manning & Napier Fund, Inc. - Financial Services Series from its inception1 (7/1/05) to present (12/31/06) to the S&P 500 Total Return Index and the S&P 500 Financials Index.
Data for line graph to follow:
| | Manning & Napier Fund, Inc. - | S&P 500 | S&P 500 |
| Date | Financial Services Series2 | Total Return Index | Financials Index |
| 7/1/05 | $10,000 | $10,000 | $10,000 |
| 9/30/05 | 10,060 | 10,360 | 10,072 |
| 12/31/05 | 10,739 | 10,576 | 10,901 |
| 3/31/06 | 11,381 | 11,021 | 11,255 |
| 6/30/06 | 11,251 | 10,862 | 11,240 |
| 9/30/06 | 11,988 | 11,851 | 23,378 |
| 12/31/06 | 12,846 | 12,245 | 12,995 |
1Performance numbers for the Series and Indices are calculated from July 1, 2005, the Series' inception date.
2The Series' performance does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. The Series' performance is historical and may not be indicative of future results.
3The S&P 500 Total Return Index is an unmanaged capitalization-weighted measure of 500 widely held common stocks listed on the New York Stock Exchange, American Stock Exchange and the Over-the-Counter market. The S&P 500 Financials Index, a sub-index of the S&P 500 Total Return Index, includes the stocks of companies involved in the business of financial related products and services. Both Indices' returns assume daily reinvestment of dividends and, unlike Series returns, do not reflect any fees or expenses.
2
Shareholder Expense Example (unaudited)
As a shareholder of the Series, you may incur two types of costs: (1) transaction costs, including potential wire charges on redemptions and (2) ongoing costs, including management fees and other Series expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Series and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (July 1, 2006 to December 31, 2006).
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Series’ actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Series’ actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid during the period. You may use this information to compare the ongoing costs of investing in the Series and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transaction costs, such as potential wire charges on redemptions. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transaction costs were included, your costs would have been higher.
| | Beginning | Ending | Expenses Paid |
| | Account Value | Account Value | During Period* |
| | 7/1/06 | 12/31/06 | 7/1/06-12/31/06 |
| Actual | $1,000.00 | $1,141.80 | $6.32 |
| Hypothetical | | | |
| (5% return before expenses) | $1,000.00 | $1,019.31 | $5.96 |
*Expenses are equal to the Series’ annualized expense ratio (for the six-month period) of 1.17%, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). Expenses are based on the most recent fiscal half year; therefore, the expense ratio stated above may differ from the expense ratio stated in the financial highlights, which is based on one-year data.
3
Portfolio Composition as of December 31, 2006 (unaudited)
Data for pie chart to follow
Sector Allocation1
| Financials (Capital Markets) | 17.2% |
| Financials (Commercial Banks) | 33.8% |
| Financials (Consumer Finance) | 4.2% |
| Financials (Diversified Financial Services) | 10.7% |
| Financials (Insurance) | 13.1% |
| Industrials | 4.2% |
| Information Technology | 12.2% |
| Cash, short-term investments, and other assets, less liabilities | 4.6% |
1As a percentage of net assets.
Top Ten Stock Holdings2
| CheckFree Corp. | 3.7% |
| U.S. Bancorp | 3.7% |
| JPMorgan Chase & Co. | 3.5% |
| Bank of America Corp. | 3.5% |
| Wachovia Corp. | 3.4% |
| PNC Financial Services Group, Inc. | 3.3% |
| Western Union Co. | 3.3% |
| SEI Investments Co. | 3.3% |
| The Dun & Bradstreet Corp. | 2.8% |
| Automatic Data Processing, Inc. | 2.8% |
2As a percentage of total investments.
4
Investment Portfolio - December 31, 2006
| | | Value |
| | Shares | (Note 2) |
| | | |
COMMON STOCKS - 95.4% | | |
| | | |
Financials - 79.0% | | |
Capital Markets - 17.2% | | |
| The Bank of New York Co., Inc. | 66,000 | $2,598,420 |
| The Charles Schwab Corp. | 116,600 | 2,255,044 |
| Franklin Resources, Inc. | 21,200 | 2,335,604 |
| Janus Capital Group, Inc. | 133,000 | 2,871,470 |
Mellon Financial Corp.1 | 55,000 | 2,318,250 |
| Merrill Lynch & Co., Inc. | 38,700 | 3,602,970 |
| Morgan Stanley | 31,600 | 2,573,188 |
| SEI Investments Co. | 73,000 | 4,347,880 |
| | | 22,902,826 |
| | | |
Commercial Banks - 33.8% | | |
| ABN AMRO Holding N.V. - ADR (Netherlands) (Note 7) | 81,000 | 2,596,050 |
| Barclays plc (United Kingdom) (Note 7) | 168,000 | 2,400,940 |
| Boston Private Financial Holdings, Inc. | 43,200 | 1,218,672 |
| HSBC Holdings plc - ADR (United Kingdom) (Note 7) | 32,700 | 2,996,955 |
| Huntington Bancshares, Inc. | 43,700 | 1,037,875 |
| KeyCorp | 56,000 | 2,129,680 |
| Marshall & Ilsley Corp. | 46,500 | 2,237,115 |
| PNC Financial Services Group, Inc. | 59,000 | 4,368,360 |
| Royal Bank of Scotland Group plc (United Kingdom) (Note 7) | 87,000 | 3,394,499 |
| Societe Generale - ADR (France) (Note 7) | 37,500 | 1,271,839 |
| SunTrust Banks, Inc. | 30,600 | 2,584,170 |
| TCF Financial Corp. | 114,000 | 3,125,880 |
| U.S. Bancorp | 135,000 | 4,885,650 |
| Wachovia Corp. | 80,000 | 4,556,000 |
| Wells Fargo & Co. | 47,000 | 1,671,320 |
| Wilmington Trust Corp. | 30,850 | 1,300,944 |
| Zions Bancorporation | 37,200 | 3,066,768 |
| | | 44,842,717 |
| | | |
Consumer Finance - 4.2% | | |
| Capital One Financial Corp. | 24,000 | 1,843,680 |
| Nelnet, Inc. - Class A* | 91,000 | 2,489,760 |
| SLM (Sallie Mae) Corp. | 27,000 | 1,316,790 |
| | | 5,650,230 |
| | | |
Diversified Financial Services - 10.7% | | |
| Bank of America Corp. | 86,700 | 4,628,913 |
| Citigroup, Inc. | 65,000 | 3,620,500 |
| Financiere Marc de Lacharriere S.A. (Fimalac) (France) (Note 7) | 13,600 | 1,305,017 |
The accompanying notes are an integral part of the financial statements.
5
Investment Portfolio - December 31, 2006
| Shares/ | Value |
| | Principal Amount | (Note 2) |
| | | |
Financials (continued) | | |
Diversified Financial Services (continued) | | |
| JPMorgan Chase & Co. | 96,000 | $4,636,800 |
| | | 14,191,230 |
| | | |
Insurance - 13.1% | | |
| Allianz SE (Germany) (Note 7) | 12,400 | 2,535,385 |
| Ambac Financial Group, Inc. | 28,650 | 2,551,856 |
| American International Group, Inc. | 48,000 | 3,439,680 |
| First American Corp. | 32,000 | 1,301,760 |
| MBIA, Inc. | 39,725 | 2,902,308 |
| Principal Financial Group, Inc. | 21,000 | 1,232,700 |
| Torchmark Corp. | 17,700 | 1,128,552 |
| Willis Group Holdings Ltd. (United Kingdom) (Note 7) | 58,500 | 2,323,035 |
| | | 17,415,276 |
Total Financials | | 105,002,279 |
| | | |
Industrials - 4.2% | | |
Commercial Services & Supplies - 4.2% | | |
| ChoicePoint, Inc.* | 46,000 | 1,811,480 |
| The Dun & Bradstreet Corp.* | 45,000 | 3,725,550 |
Total Industrials | | 5,537,030 |
| | | |
Information Technology - 12.2% | | |
IT Services - 12.2% | | |
| Automatic Data Processing, Inc. | 75,000 | 3,693,750 |
| CheckFree Corp.* | 123,000 | 4,939,680 |
| First Data Corp. | 75,000 | 1,914,000 |
| Paychex, Inc. | 33,175 | 1,311,740 |
| Western Union Co. | 194,000 | 4,349,480 |
Total Information Technology | | 16,208,650 |
| | | |
TOTAL COMMON STOCKS | | |
| (Identified Cost $111,117,487) | | 126,747,959 |
| | | |
SHORT-TERM INVESTMENTS - 4.1% | | |
| Dreyfus Treasury Cash Management - Institutional Shares | 3,916,629 | 3,916,629 |
| U.S. Treasury Bill, 1/11/2007 | $1,500,000 | 1,497,813 |
| | | |
TOTAL SHORT-TERM INVESTMENTS | | |
| (Identified Cost $5,414,650) | | 5,414,442 |
The accompanying notes are an integral part of the financial statements.
6
Investment Portfolio - December 31, 2006
| | Value |
| | (Note 2) |
| | |
TOTAL INVESTMENTS - 99.5% | |
| (Identified Cost $116,532,137) | $132,162,401 |
| | |
OTHER ASSETS, LESS LIABILITIES - 0.5% | 692,968 |
| | |
NET ASSETS - 100% | $132,855,369 |
*Non-income producing security
ADR - American Depository Receipt
1Mellon Financial Corp. is the parent company of Mellon Trust of New England N.A., the Fund's custodian.
The accompanying notes are an integral part of the financial statements.
7
Statement of Assets and Liabilities
December 31, 2006
ASSETS: | |
| | |
| Investments, at value (identified cost $116,532,137) (Note 2) | $132,162,401 |
| Cash | 61 |
| Receivable for fund shares sold | 756,201 |
| Dividends receivable | 168,552 |
| Foreign tax reclaims receivable | 15,651 |
| | |
| TOTAL ASSETS | 133,102,866 |
| | |
LIABILITIES: | |
| | |
| Accrued management fees (Note 3) | 110,444 |
| Accrued fund accounting and transfer agent fees (Note 3) | 9,263 |
| Accrued Chief Compliance Officer service fees (Note 3) | 438 |
| Accrued directors' fees (Note 3) | 226 |
| Payable for fund shares repurchased | 90,967 |
| Audit fees payable | 25,592 |
| Other payables and accrued expenses | 10,567 |
| | |
| TOTAL LIABILITIES | 247,497 |
| | |
TOTAL NET ASSETS | $132,855,369 |
| | |
NET ASSETS CONSIST OF: | |
| | |
| Capital stock | $106,220 |
| Additional paid-in-capital | 115,200,202 |
| Undistributed net investment income | 40,469 |
| Accumulated net realized gain on investments, foreign currency, and other assets and liabilities | 1,877,797 |
| Net unrealized appreciation on investments and other assets and liabilities | 15,630,681 |
| | |
TOTAL NET ASSETS | $132,855,369 |
| | |
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE ($132,855,369/10,621,970 shares) | $12.51 |
The accompanying notes are an integral part of the financial statements.
8
For the Year Ended December 31, 2006
INVESTMENT INCOME: | |
| | |
| Dividends (net of foreign tax withheld, $24,500) | $2,175,984 |
| Interest | 52,754 |
| | |
| Total Investment Income | 2,228,738 |
| | |
EXPENSES: | |
| | |
| Management fees (Note 3) | 957,151 |
| Fund accounting and transfer agent fees (Note 3) | 89,743 |
| Directors' fees (Note 3) | 7,000 |
| Chief Compliance Officer service fees (Note 3) | 5,950 |
| Custodian fees | 8,799 |
| Miscellaneous | 67,261 |
| | |
| Total Expenses | 1,135,904 |
| | |
| NET INVESTMENT INCOME | 1,092,834 |
| | |
REALIZED AND UNREALIZED GAIN ON INVESTMENTS: | |
| | |
| Net realized gain on - | |
| Investments | 3,531,999 |
| Foreign currency and other assets and liabilities | 1,110 |
| | |
| | 3,533,109 |
| | |
| Net change in unrealized appreciation on - | |
| Investments | 12,687,732 |
| Foreign currency and other assets and liabilities | 417 |
| | |
| | 12,688,149 |
| | |
| NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS | 16,221,258 |
| | |
| NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS | $17,314,092 |
The accompanying notes are an integral part of the financial statements.
9
Statements of Changes in Net Assets
| | For the | For the Period |
| | Year Ended | 7/1/051 to |
| | 12/31/06 | 12/31/05 |
INCREASE (DECREASE) IN NET ASSETS: | | |
| | | |
OPERATIONS: | | |
| | | |
| Net investment income | $1,092,834 | $216,747 |
| Net realized gain on investments and foreign currency | 3,533,109 | 204,647 |
| Net change in unrealized appreciation on investments and foreign currency | 12,688,149 | 2,942,532 |
| | | |
| Net increase from operations | 17,314,092 | 3,363,926 |
| | | |
DISTRIBUTIONS TO SHAREHOLDERS (Note 9): | | |
| | | |
| From net investment income | (1,089,560) | (180,182) |
| From net realized gain on investments | (1,860,551) | - |
| | | |
| Total distributions to shareholders | (2,950,111) | (180,182) |
| | | |
CAPITAL STOCK ISSUED AND REPURCHASED: | | |
| | | |
| Net increase from capital share transactions (Note 5) | 68,817,354 | 46,490,290 |
| | | |
| Net increase in net assets | 83,181,335 | 49,674,034 |
| | | |
NET ASSETS: | | |
| | | |
| Beginning of period | 49,674,034 | - |
| | | |
End of period (including undistributed net investment income of $40,469 and $36,565, respectively) | $132,855,369 | $49,674,034 |
1Commencement of operations.
The accompanying notes are an integral part of the financial statements.
10
| | For the | For the Period |
| | Year Ended | 7/1/051 to |
| | 12/31/06 | 12/31/05 |
Per share data (for a share outstanding throughout | | |
each period): | | |
| | | |
Net asset value - Beginning of period | $10.70 | $10.00 |
| | | |
| Income from investment operations: | | |
| Net investment income | 0.10 | 0.05 |
| Net realized and unrealized gain on investments | 2.00 | 0.69 |
| | | |
| Total from investment operations | 2.10 | 0.74 |
| | | |
| Less distributions to shareholders: | | |
| From net investment income | (0.11) | (0.04) |
| From net realized gain on investments | (0.18) | - |
| | | |
| Total distributions to shareholders | (0.29) | (0.04) |
| | | |
Net asset value - End of period | $12.51 | $10.70 |
| | | |
Total return2 | 19.62% | 7.39% |
| | | |
Ratios (to average net assets)/Supplemental Data: | | |
| Expenses* | 1.18% | 1.20%3 |
| Net investment income | 1.14% | 0.95%3 |
| | | |
| Portfolio turnover | 30% | 6% |
| | | |
Net assets - End of period (000's omitted) | $132,855 | $49,674 |
*The investment advisor did not impose all of its management fee in some periods. If these expenses had been incurred by the Series, the expense ratio (to average net assets) would have been increased as follows:
1Commencement of operations.
2Represents aggregate total return for the period indicated, and assumes reinvestment of all distributions. Total return would have been lower had certain expenses not been waived during certain periods. Periods less than one year are not annualized.
3Annualized.
The accompanying notes are an integral part of the financial statements.
11
Notes to Financial Statements
1. ORGANIZATION
Financial Services Series (the "Series") is a no-load non-diversified series of Manning & Napier Fund, Inc. (the "Fund"), formerly Exeter Fund, Inc. The Fund is organized in Maryland and is registered under the Investment Company Act of 1940 (the “1940 Act”), as amended, as an open-end management investment company.
The Series' investment objective is to provide long-term growth by investing principally in the common stocks of companies in the financial services industry.
The Fund’s Advisor is Manning & Napier Advisors, Inc. (the “Advisor”). Shares of the Series are offered to investors, clients and employees of the Advisor and its affiliates. The total authorized capital stock of the Fund consists of 1.7 billion shares of common stock each having a par value of $0.01. As of December 31, 2006, 1.16 billion shares have been designated in total among 21 series, of which 50 million have been designated as Financial Services Series Class A common stock.
2. SIGNIFICANT ACCOUNTING POLICIES
Security Valuation
Portfolio securities, including domestic equities, foreign equities, exchange-traded funds and options, listed on an exchange other than the NASDAQ National Market System are valued at the latest quoted sales price of the exchange on which the security is primarily traded. Securities not traded on valuation date or securities not listed on an exchange are valued at the latest quoted bid price provided by the Fund’s pricing service. Securities listed on the NASDAQ National Market System are valued in accordance with the NASDAQ Official Closing Price.
Securities for which representative valuations or prices are not available from the Fund's pricing service may be valued at fair value. If trading or events occurring after the close of the principal market in which securities are traded are expected to materially affect the value of those securities, then they may be valued at their fair value, taking this trading or these events into account. Fair value is determined in good faith by the Advisor under procedures approved by and under the general supervision and responsibility of the Fund's Board of Directors (the “Board”).
Short-term investments that mature in sixty days or less are valued at amortized cost, which approximates market value. Investments in open-end investment companies are valued at their net asset value per share on valuation date, with the exception of exchange-traded funds as noted above.
Security Transactions, Investment Income and Expenses
Security transactions are accounted for on trade date. Dividend income is recorded on the ex-dividend date, except that if the ex-dividend date has passed, certain dividends from foreign securities are recorded as soon as the Fund is informed of the ex-dividend date. Non-cash dividends, if any, are recorded at the fair market value of the securities received. Interest income and expenses are recorded on an accrual basis.
Most expenses of the Fund can be attributed to a specific series. Expenses which cannot be directly attributed are apportioned among the series in the Fund in such a manner as deemed equitable by the Fund's Board, taking into consideration, among other things, the nature and type of expense.
Interest income, including amortization of premium and accretion of discounts using the effective interest method, is earned from settlement date and accrued daily.
The Series uses the identified cost method for determining realized gain or loss on investments for both financial statement and federal income tax reporting purposes.
12
Notes to Financial Statements
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Foreign Currency Translation
The books and records of the Series are maintained in U.S. dollars. Foreign currencies, investments and other assets and liabilities are translated into U.S. dollars at the current exchange rates. Purchases and sales of investment securities and income and expenses are translated on the respective dates of such transactions. The Series does not isolate realized and unrealized gains and losses attributable to changes in the exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized foreign currency gains and losses represent foreign currency gains and losses between trade date and settlement date on securities transactions, gains and losses on disposition of foreign currencies and the difference between the amount of income and foreign withholding taxes recorded on the books of the Series and the amounts actually received or paid.
Federal Taxes
The Series' policy is to comply with the provisions of the Internal Revenue Code applicable to regulated investment companies. The Series is not subject to federal income or excise tax to the extent that the Series distributes to shareholders each year its taxable income, including any net realized gains on investments, in accordance with requirements of the Internal Revenue Code. Accordingly, no provision for federal income tax or excise tax has been made in the financial statements.
Distributions of Income and Gains
Distributions to shareholders of net investment income and net realized gains are made annually. An additional distribution may be necessary to avoid taxation of the Series. Distributions are recorded on the ex-dividend date.
Indemnifications
The Fund’s organizational documents provide former and current directors and officers with a limited indemnification against liabilities arising in connection with the performance of their duties to the Fund. In the normal course of business, the Fund may also enter into contracts that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown as this would be dependent on future claims that may be made against the Fund. The risk of material loss from such claims is considered remote.
Other
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
3. TRANSACTIONS WITH AFFILIATES
The Fund has an Investment Advisory Agreement (the “Agreement”) with the Advisor, for which the Series pays a fee, computed daily and payable monthly, at an annual rate of 1.00% of the Series’ average daily net assets.
Under the Agreement, personnel of the Advisor provide the Series with advice and assistance in the choice of investments and the execution of securities transactions, and otherwise maintain the Series’ organization. The Advisor also provides the Fund with necessary office space and fund administration and support services. The salaries of all officers of the Fund (except
13
Notes to Financial Statements
3. TRANSACTIONS WITH AFFILIATES (continued)
a percentage of the Fund’s Chief Compliance Officer’s salary, which is paid by the Fund, and the Special Assistant Secretary’s salary, which is paid by BISYS Fund Services Ohio, Inc. (“BISYS”)), and of all Directors who are "affiliated persons" of the Fund, or of the Advisor, and all personnel of the Fund, or of the Advisor, performing services relating to research, statistical and investment activities, are paid by the Advisor. Each "non-affiliated" Director receives an annual stipend, which is allocated among all the active series of the Fund. In addition, these Directors also receive a fee per Board meeting attended for each active series of the Fund plus a fee for each committee meeting attended.
The Advisor has contractually agreed, until at least April 30, 2008, to waive its fee and, if necessary, pay other operating expenses of the Series in order to maintain total expenses for the Series at no more than 1.20% of average daily net assets each year. For the year ended December 31, 2006, the Advisor did not waive its management fee or reimburse any expenses of the Series. The Advisor is not eligible to recoup any expenses that have been waived or reimbursed in prior years.
Manning & Napier Investor Services, Inc., a registered broker-dealer affiliate of the Advisor, acts as distributor for the Fund's shares. The services of Manning & Napier Investor Services, Inc. are provided at no additional cost to the Series.
For fund accounting and transfer agent services, through October 31, 2006, the Fund paid the Advisor an annual fee of 0.12% of the Fund’s average daily net assets up to $900 million, 0.09% of the Fund’s average daily net assets between $900 million and $1.5 billion, and 0.05% of the Fund’s average daily net assets over $1.5 billion. Effective November 1, 2006, the fee rates were reduced as follows: 0.11% of the Fund’s average daily net assets up to $900 million, 0.07% of the Fund’s average daily net assets between $900 million and $1.5 billion, and 0.04% of the Fund’s average daily net assets over $1.5 billion. Additionally, certain transaction and account-based fees and out-of-pocket expenses, including charges for reporting relating to the Fund’s compliance program, are charged. Expenses not directly attributable to a series are allocated based on each series’ relative net assets or number of accounts, depending on the expense. The Advisor has an agreement with BISYS under which BISYS serves as sub-accounting services and sub-transfer agent.
4. PURCHASES AND SALES OF SECURITIES
For the year ended December 31, 2006, purchases and sales of securities, other than United States Government securities and short-term securities, were $90,188,426 and $27,893,498, respectively. There were no purchases or sales of United States Government securities.
An employee of The BISYS Group, Inc. serves as an officer of the Fund. Therefore, The BISYS Group, Inc. is considered an “affiliated company”, as defined in the 1940 Act. The following transactions were effected in shares of The BISYS Group, Inc. for the year ended December 31, 2006:
Purchases | Sales | |
Shares | Cost | Shares | Proceeds | Realized Gain | Income |
| 70,000 | $1,084,713 | 147,300 | $2,203,048 | $14,848 | $- |
As of December 31, 2006, the Series did not hold any shares of affiliated companies.
14
Notes to Financial Statements
5. CAPITAL STOCK TRANSACTIONS
Transactions in shares of Financial Services Series were:
| | | For the Period 7/1/05 |
| | For the Year | (commencement of |
| | Ended 12/31/06 | operations) to 12/31/05 |
| | Shares | Amount | Shares | Amount |
| Sold | 6,045,105 | $69,415,961 | 4,696,385 | $47,040,740 |
| Reinvested | 232,171 | 2,891,162 | 16,137 | 174,282 |
| Repurchased | (297,702) | (3,489,769) | (70,126) | (724,732) |
| Total | 5,979,574 | $68,817,354 | 4,642,396 | $46,490,290 |
Substantially all of the Series’ shares represent investments by fiduciary accounts over which the Advisor has sole investment discretion.
6. FINANCIAL INSTRUMENTS
The Series may trade in financial instruments with off-balance sheet risk in the normal course of its investing activities to assist in managing exposure to various market risks. These financial instruments include written options, forward foreign currency exchange contracts and futures contracts and may involve, to a varying degree, elements of risk in excess of the amounts recognized for financial statement purposes. No such investments were held by the Series on December 31, 2006.
7. FOREIGN SECURITIES
Investing in securities of foreign companies and foreign governments involves special risks and considerations not typically associated with investing in securities of domestic companies and the United States Government. These risks include revaluation of currencies and future adverse political and economic developments. Moreover, securities of foreign companies and foreign governments and their markets may be less liquid and their prices more volatile than those of comparable domestic companies and the United States Government.
8. FINANCIAL SERVICES SECURITIES
The Series may focus its investments in certain related financial services industries; hence, the Series may subject itself to a greater degree of risk than a series that is more diversified.
9. FEDERAL INCOME TAX INFORMATION
The amount and characterization of certain income and capital gains to be distributed are determined in accordance with federal income tax regulations, which may differ from accounting principles generally accepted in the United States of America. These differences are primarily due to differing book and tax treatments in the timing of the recognition of net investment income or gains and losses, including foreign currency gains and losses. The Series may periodically make reclassifications among its capital accounts to reflect income and gains available for distribution (or available capital loss carryovers) under income tax regulations, without impacting the Series’ net asset value. Any such reclassifications are not reflected in the financial highlights.
15
Notes to Financial Statements
9. FEDERAL INCOME TAX INFORMATION (continued)
The tax character of distributions paid were as follows:
| | | For the Period 7/1/05 |
| | For the Year | (commencement of |
| | Ended 12/31/06 | operations) to 12/31/05 |
| Ordinary income | $2,451,358 | $180,182 |
| Long-term capital gains | 498,753 | - |
Pursuant to Section 852 of the Internal Revenue Code, as amended, the Series hereby designates the long-term capital gains disclosed above as capital gains for its taxable year ended December 31, 2006.
At December 31, 2006, the tax basis components of distributable earnings and the net unrealized appreciation based on identified cost for federal income tax purposes were as follows:
| Cost for federal income tax purposes | $116,532,137 |
| | |
| Unrealized appreciation | $16,113,544 |
| Unrealized depreciation | (483,280) |
| | |
| Net unrealized appreciation | $15,630,264 |
| Undistributed ordinary income | 1,362,857 |
| Undistributed long-term capital gains | 555,409 |
10. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement 109. FIN 48 supplements FASB Statement 109, Accounting for Income Taxes, by defining the confidence level that a tax position must meet in order to be recognized in the financial statements. FIN 48 provides guidance for how a fund should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the fund has taken or expects to take on a tax return. FIN 48 requires that the tax effects of a position be recognized only if it is “more likely than not” to be sustained based solely on its technical merits. Tax positions not deemed to meet the more likely than not threshold would be recorded as a tax benefit or expense in the current year. FIN 48 needs to be implemented no later than the first required financial statement reporting period for its fiscal year beginning after December 15, 2006 and is to be applied to all open tax years as of the effective date. At adoption, the financial statements must be adjusted to reflect only those tax positions that are more likely than not to be sustained as of the adoption date. Management of the Fund is currently evaluating the impact that FIN 48 will have on the Series’ financial statements.
In addition, in September 2006, FASB Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“FAS 157”) was issued, and is effective for fiscal years beginning after November 15, 2007. FAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosure about fair value measurements. The standard does not expand the use of fair value in any new circumstances, but provides clarification on acceptable fair value methods and applications. At this time, management is evaluating the implications of FAS 157, but it is not expected to materially impact the Series’ financial statements.
16
Report of Independent Registered Public Accounting Firm
To the Board of Directors of Manning & Napier Fund, Inc. and Shareholders of Financial Services Series:
In our opinion, the accompanying statement of assets and liabilities, including the investment portfolio, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the Financial Services Series (a series of Manning & Napier Fund, Inc., hereafter referred to as the "Series") at December 31, 2006, and the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Series’ management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2006 by correspondence with the custodian, provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Columbus, Ohio
February 9, 2007
17
Supplemental Tax Information (unaudited)
For federal income tax purposes, the Series designates for the current fiscal year $1,466,998 or, if different, the maximum amount allowable under the tax law as qualified dividend income.
For corporate shareholders, the percentage of investment income (dividend income plus short-term gains, if any) that qualifies for the dividends received deduction for the current fiscal year is 32.6%.
18
Renewal of Investment Advisory Agreement (unaudited)
At the Manning & Napier Fund, Inc. (the “Fund”) Board of Directors’ (the “Board”) annual in-person meeting, held on November 16, 2006, the Investment Advisory Agreement (the “Agreement”) between the Fund and Manning & Napier Advisors, Inc. (the “Advisor”) was reviewed by the Board for renewal. In connection with the decision whether to renew the Agreement, a variety of material was prepared for and reviewed by the Board. In addition, at the meeting of the Board, representatives of the Advisor presented additional oral and written information to help the Board evaluate the Advisor’s performance under the Agreement over the previous year. The Board then deliberated on the renewal of the Agreement in light of the various material provided prior to and at the meeting.
In connection with its review and deliberations, the Board considered the following factors and reached a conclusion with respect to such factors.
| · | The Board considered the services provided by the Advisor under the Agreement including, among others: deciding what securities to purchase and sell for each Series; arranging for the purchase and sale of such securities by placing orders with broker-dealers; administering the affairs of the Fund (including the books and records of the Fund not maintained by third party service providers such as the custodian or sub-transfer agent); arranging for the insurance coverage for the Fund; and supervising the preparation of tax returns, SEC filings (including registration statements) and reports to shareholders for the Fund. The Board discussed the quality of these services with representatives from the Advisor and concluded that the Advisor was performing its services to the Fund required under the Agreement in a reasonable manner. |
| · | The Board considered the investment performance of the various Series of the Fund. The investment performance for each Series was reviewed on a cumulative basis since inception and on a one year basis. In addition, annualized peformance for the following time periods was considered: inception, three year, five year, ten year, and current market cycle. A market cycle includes periods of both rising and falling markets. Returns for established benchmark indices for each Series were provided for each time period. In addition, the Board considered at the meeting (and considers on a quarterly basis) a peer group performance analysis consisting of Morningstar universes of mutual funds with similar investment objectives. The Board discussed the performance with representatives from the Advisor and concluded that the investment performance of each of the Fund’s Series was reasonable based on the Fund’s actual performance and comparative performance, especially performance over the current market cycle. |
| · | The Board considered the costs of the Advisor’s services and the profits of the Advisor as they relate to the Advisor’s services to the Fund under the Agreement. In reviewing the Advisor’s costs and profits, the Board discussed the Advisor’s revenues generated from the Fund (on both an actual and adjusted basis) and its expenses associated with providing the services under the Agreement. In addition, the Board reviewed the Advisor’s expenses associated with Fund activities outside of the Agreement (such as expense reimbursements pursuant to expense caps and payments made by the Advisor to third party platforms on which shares of the Fund are available for purchase). It was noted by representatives of the Advisor that 6 of the 18 active Series of the Fund are currently experiencing expenses above the capped expense ratios. After discussing the above costs and profits, the Board concluded that the Advisor’s profitability relating to its services provided under the Agreement is reasonable. |
| · | The Board considered the fees and expenses of the various Series of the Fund. The Advisor presented the advisory fees and total expenses for each Series, including the advisory fee adjusted for any expense waivers or reimbursements (either contractual or voluntary) paid by the Advisor. The advisory fees and expense ratios of each Series were compared to an average (on both a mean and median basis) of similar funds as disclosed on the Morningstar database. Representatives of the Advisor discussed with the Board the levels of its advisory fee for each Series of the Fund and as compared to the median and mean advisory fees for similar funds as listed on Morningstar. Expense ratios for every Series, except the High Yield Bond Series, are currently below the median and mean for similar funds as listed on Morningstar. Based on their review of the information provided, the Board concluded that the fees and expenses of each Series of the Fund were reasonable on a comparative basis. |
19
Renewal of Investment Advisory Agreement (unaudited)
| · | The Board also considered the other benefits the Advisor derives from its relationship with the Fund. Such other benefits include certain research products provided by soft dollars. Given the level of soft dollar transactions involving the Fund, the Board concluded that these additional benefits to the Advisor were reasonable. |
| · | In addition to the factors described above, the Board considered the Advisor’s personnel, the Advisor’s investment strategies, the Advisor’s policies and procedures relating to compliance with personal securities transactions, and the Advisor’s reputation, expertise and resources in domestic and foreign financial markets. The Board concluded that these factors support the conclusion that the Advisor performs its services in a reasonable manner. |
| · | The Board did not consider economies of scale at this time because of the multiple uses of the Fund (for the Advisor’s discretionary investment account clients in addition to direct investors), the current profitability of the Advisor’s services to the Fund under the Agreement, and the overall size of the Fund complex. |
Based on the Board’s conclusions regarding the factors described above, the Board, including a majority of Directors that are “not interested” as defined in the Investment Company Act of 1940, approved the renewal of the Agreement for another year. In the course of their deliberations, the Directors did not identify any particular information that was all important or controlling.
20
Directors’ and Officers’ Information (unaudited)
The Statement of Additional Information provides additional information about the Fund's directors and officers and can be obtained without charge by calling 1-800-466-3863, at www.manningnapieradvisors.com, or on the EDGAR Database on the SEC Internet web site (http:\\www.sec.gov). The following chart shows certain information about the Fund's officers and directors, including their principal occupations during the last five years. Unless specific dates are provided, the individuals have held the listed positions for longer than five years.
INTERESTED DIRECTOR/OFFICER | |
| Name: | B. Reuben Auspitz* |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 59 |
| Current Position(s) Held with Fund: | Principal Executive Officer, President, Chairman & Director |
Term of Office1& Length of Time Served: | Indefinite - Director since 1984; Vice President 1984 - 2003; President since 2004; |
| | Principal Executive Officer since 2002 |
| Principal Occupation(s) During Past 5 Years: | Executive Vice President; Co-Executive Director; Executive Group Member**; Chief |
| | Compliance Officer since 2004 - Manning & Napier Advisors, Inc. President; Director - |
| | Manning & Napier Investor Services, Inc. Holds or has held one or more of |
| | the following titles for various subsidiaries and affiliates: President, Vice President, |
| | Director, Chairman, Treasurer, Chief Compliance Officer or Member. |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| | |
INDEPENDENT DIRECTORS | |
| Name: | Stephen B. Ashley |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 66 |
| Current Position(s) Held with Fund: | Director, Audit Committee Member, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1996 |
| Principal Occupation(s) During Past 5 Years: | Chairman, Director, President & Chief Executive Officer, |
| | The Ashley Group (property management and investment) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | Genesee Corp. |
| | The Ashley Group |
| | Fannie Mae |
| | |
| Name: | Peter L. Faber |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 68 |
| Current Position(s) Held with Fund: | Director, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1987 |
| Principal Occupation(s) During Past 5 Years: | Senior Counsel, McDermott, Will & Emery LLP (law firm) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | Partnership for New York City, Inc. |
| | New York Collegium |
| Name: | Harris H. Rusitzky |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 72 |
| Current Position(s) Held with Fund: | Director, Audit Committee Member, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1985 |
| Principal Occupation(s) During Past 5 Years: | President, The Greening Group (business consultants); Partner, The Restaurant Group |
| | (restaurants) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
21
Directors' and Officers' Information (unaudited)
OFFICERS | |
| Name: | Jeffrey S. Coons, Ph.D., CFA |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 43 |
| Current Position(s) Held with Fund: | Vice President |
Term of Office1& Length of Time Served: | Since 2004 |
| Principal Occupation(s) During Past 5 Years: | Co-Director of Research since 2002 & Executive Group Member**, |
| | Manning & Napier Advisors, Inc. Managing Director - Risk Management, Manning & |
| | Napier Advisors, Inc., 1993-2002. Holds one or more of the following titles for various |
| | subsidiaries and affiliates: President, Director, Treasurer or Senior Trust Officer. |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Christine Glavin |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 40 |
| Current Position(s) Held with Fund: | Principal Financial Officer, Chief Financial Officer |
Term of Office1& Length of Time Served: | Principal Financial Officer since 2002; Chief Financial Officer since 2001 |
| Principal Occupation(s) During Past 5 Years: | Fund Accounting Manager, Manning & Napier Advisors, Inc. |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Jodi L. Hedberg |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 39 |
| Current Position(s) Held with Fund: | Corporate Secretary, Chief Compliance Officer, Anti-Money Laundering Compliance |
| | Officer |
Term of Office1& Length of Time Served: | Corporate Secretary since 1997; Chief Compliance Officer since 2004 |
| Principal Occupation(s) During Past 5 Years: | Director of Compliance, Manning & Napier Advisors, Inc. and affiliates; Corporate |
| | Secretary, Manning & Napier Investor Services, Inc. since 2006 |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Alaina V. Metz |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 39 |
| Current Position(s) Held with Fund: | Special Assistant Secretary |
| Term of Office & Length of Time Served: | Indefinite - Since 2002 |
| Principal Occupation(s) During Past 5 Years: | Vice President, BISYS Fund Services Ohio, Inc. (mutual fund servicing company) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
*Interested Director, within the meaning of the Investment Company Act of 1940 by reason of his position with the Fund's investment advisor and distributor. Mr. Auspitz serves as the Executive Vice President and Director, Manning & Napier Advisors, Inc. and President and Director, Manning & Napier Investor Services, Inc., the Fund's distributor.
**The Executive Group performs the duties of the Office of the Chief Executive of Manning & Napier Advisors, Inc.
1The term of office for President, Vice President, Chief Financial Officer, and Corporate Secretary is one year and until their respective successors are chosen and qualified. All other officers' terms are indefinite.
22
Literature Requests (unaudited)
Proxy Voting Policies and Procedures
A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request:
By phone 1-800-466-3863
On the Securities and Exchange
Commission’s (SEC) web site http://www.sec.gov
Proxy Voting Record
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30th is available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
Quarterly Portfolio Holdings
The Series’ complete schedule of portfolio holdings for the 1st and 3rd quarters of each fiscal year are provided on Form N-Q, and are available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
The Series’ Form N-Q may be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
Prospectus and Statement of Additional Information (SAI)
The prospectus and SAI provide additional information about each Series, including charges, expenses and risks. These documents are available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
On the Advisor’s web site http://www.manningnapieradvisors.com
Additional information available at www.manningnapieradvisors.com
| 1. | Fund Holdings - Month-End |
| 2. | Fund Holdings - Quarter-End |
| 3. | Shareholder Report - Annual |
| 4. | Shareholder Report - Semi-Annual |
23
ITEM 2: CODE OF ETHICS
(a) The registrant has adopted a code of ethics that applies to its principal executive officer, principal financial officer and principal accounting officer. A copy of the registrant's code of ethics is filed herewith as Exhibit 12(a)(1).
(b) During the period covered by this report, no amendments were made to the provisions of the code of ethics adopted in 2 (a) above.
(c) During the period covered by this report, no implicit or explicit waivers to the provisions of the code of ethics adopted in 2 (a) above were granted.
(d) Not applicable to the registrant due to the response given in 2 (c) above.
ITEM 3: AUDIT COMMITTEE FINANCIAL EXPERT
All of the members of the Audit committee have been determined by the Registrant's Board of Directors to be Audit Committee Financial Experts as defined by this item. The members of the Audit Committee are: Harris H. Rusitzky and Stephen B. Ashley. All Audit Committee members are independent under applicable rules. This designation will not increase the designee's duties, obligations or liability as compared to their duties, obligations and liability as a member of the Audit Committee and of the Board.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Principal Accountant Fees and Services
Aggregate fees for professional services rendered for the Manning & Napier Fund, Inc. (Small Cap Series, International Series, World Opportunities Series, Life Sciences Series, Technology Series, Financial Services Series, New York Tax Exempt Series, Ohio Tax Exempt Series, Diversified Tax Exempt Series, Core Bond Series, and Core Plus Bond Series, collectively the “Fund”) by PricewaterhouseCoopers LLP (“PwC”) as of and for the years ended December 31, 2006 and 2005 were:
| | 2006 | 2005 |
| | | |
| Audit Fees (a) | $254,830 | $236,600 |
| | | |
| Audit Related Fees (b) | - | - |
| | | |
| Tax Fees (c) | 65,120 | 62,020 |
| | | |
| All Other Fees (d) | - | - |
| | | |
| | $319,950 | $298,620 |
These fees relate to professional services rendered by PwC for the audit of the Fund’s annual financial statements or services normally provided by the accountant in connection with statutory and regulatory filing or engagements. These services include the audits of the financial statements of the Fund, issuance of consents, income tax provision procedures and assistance with review of documents filed with the SEC.
These fees relate to assurance and related services by PwC that are reasonably related to the performance of the audit of the Fund’s financial statements and are not reported under “Audit Fees” above.
These fees relate to professional services rendered by PwC for tax compliance, tax advice and tax planning. The tax services provided by PwC related to the preparation of the Fund’s federal and state income tax returns, excise tax calculations and returns, a review of the Fund’s calculations of capital gain and income distributions, and additional tax research for compliance purposes.
These fees relate to products and services provided by PwC other than those reported above under “Audit Fees,” “Audit-Related Fees,” and “Tax Fees” above.
There were no amounts that were approved by the Audit Committee pursuant to the de minimus exception (Rule 2-01(c)(7) of Regulation S-X) for the fiscal years ended December 31, 2006 and 2005.
Non-Audit Services to the Fund’s Service Affiliates that were Pre-Approved by the Fund’s Audit Committee
The Fund’s Audit Committee is required to pre-approve non-audit services which meet both the following criteria:
| i) | Directly relate to the Fund’s operations and financial reporting; and |
| ii) | Rendered by PwC to the Fund’s advisor, Manning & Napier Advisors, Inc., and entities in a control relationship with the advisor (“service affiliate”) that provide ongoing services to the Fund. For purposes of disclosure, Manning & Napier Investor Services, Inc. is considered to be a service affiliate. |
| | 2006 | 2005 |
| | | |
| Audit Related Fees | $9,317 | $6,024 |
| | | |
| Tax Fees | - | - |
| | | |
| | $9,317 | $6,024 |
The Audit Related fees for the years ended December 31, 2006 and 2005 were for 17Ad-13 internal control examinations, a license for proprietary automated financial statement disclosure software and a license for proprietary authoritative financial reporting and assurance literature library software.
There were no amounts that were approved by the Audit Committee pursuant to the de minimus exception (Rule 2-01(c)(7) of Regulation S-X) for the fiscal years ended December 31, 2006 and 2005.
Aggregate Fees
Aggregate fees billed to the Fund for non-audit services for 2006 and 2005 were $65,120 and $62,020, respectively. Aggregate fees billed to the Fund’s advisor and service affiliates for non-audit services were $9,317 and $51,129, respectively. These amounts include fees for non-audit services required to be pre-approved and fees for non-audit services that did not require pre-approval since they did not relate to the Fund’s operations and financial reporting.
The Fund’s Audit Committee has considered whether the provisions for non-audit services to the Fund’s advisor and service affiliates, that did not require pre-approval, is compatible with maintaining PwC’s independence.
ITEM 5: AUDIT COMMITTEE OF LISTED REGISTRANTS
Not Applicable.
ITEM 6: SCHEDULE OF INVESTMENTS
See Investment Portfolios under Item 1 on this Form N-CSR.
ITEM 7: DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES
Not applicable.
ITEM 8: PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES
Not applicable.
ITEM 9: PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS
Not applicable.
ITEM 10: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There have been no material changes to the procedure by which shareholders may recommend nominees to the registrant's board of directors.
ITEM 11: CONTROLS AND PROCEDURES
(a) Based on their evaluation of the Funds' disclosure controls and procedures, as of a date within 90 days of the filing date, the Funds' Principal Executive Officer and Principal Financial Officer have concluded that the Funds' disclosure controls and procedures are: (i) reasonably designed to ensure that information required to be disclosed in this report is appropriately communicated to the Funds' officers to allow timely decisions regarding disclosures required in this report; (ii) reasonably designed to ensure that information required to be disclosed in this report is recorded, processed, summarized and reported in a timely manner; and (iii) are effective in achieving the goals described in (i) and (ii) above.
(b) During the second fiscal quarter of the period covered by this report, there have been no changes in the Funds' internal control over financial reporting that the above officers believe to have materially affected, or to be reasonably likely to materially affect, the Funds' internal control over financial reporting.
ITEM 12: EXHIBITS
(a)(1) Code of ethics that is subject to the disclosure of Item 2 above.
(a)(2) Separate certifications for the Registrant's principal executive officer and principal financial officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002 and Rule 30a-2(a) under the Investment Company Act of 1940, are attached as Ex-99.CERT.
(a)(3) Not applicable.
(b) A certification of the Registrant's principal executive officer and principal financial officer, as required by 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and Rule 30a-2(b) under the Investment Company Act of 1940, is attached as Ex-99.906CERT. The certification furnished pursuant to this paragraph is not deemed to be "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section. Such certification is not deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Registrant specifically incorporates them by reference.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Manning & Napier Fund, Inc.
/s/ B. Reuben Auspitz
B. Reuben Auspitz
President & Principal Executive Officer of Manning & Napier Fund, Inc.
February 28, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ B. Reuben Auspitz
B. Reuben Auspitz
President & Principal Executive Officer of Manning & Napier Fund, Inc.
February 28, 2007
/s/ Christine Glavin
Christine Glavin
Chief Financial Officer & Principal Financial Officer of Manning & Napier Fund, Inc.
February 28, 2007
